Fiat Currencies vs. Gold; Paul Singer on Current Conditions; Readings

Fiat Currencies

Curiously, many people argue this would be a good time to abandon gold. We don’t think so – we rather think that faith in central banks will eventually crumble, and then it will be well and truly ‘game over’ for these perpetual bubble machines. As a friend of ours frequently remarks: at that point the question of how to price gold will be akin to asking what the last functioning parachute on an airplane that is going down should be worth.

Hedge fund “friend” upon hearing that I own gold, “If you were a lot smarter, we could call you stupid.”

Why Gold?

No, I am not actually doing what I posted here: I own gold bullion and several precious metals miners, so yesterday when the stock market is up 1/2% while my portfolio drops 1%+, I take comfort when I review why I own gold:

“In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.

For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.”

Meanwhile, sentiment in gold and precious metals miners is at historic (20 year) lows: and Short Side of Long

While……..China and other Asian countries buy on dips.China Gold Imports

China_official_20gold holdings

I don’t buy the gold bugs premise that central banks will back their currencies with gold unless forced to by the market/the public. However, central bankers buying may indicate the lack of trust in their colleagues’ fiat currencies.  Also, gold “flowing” East represents a wealth transfer from West to East.

Print, print:

In The Wilderness by Paul Singer

[T]he financial system (including the institutions themselves, products traded, and risks taken) has “gotten away from” the Fed’s ability to comprehend. The Fed is primarily responsible for that state of affairs, and it is out of its depth. Former Chairman Greenspan created — and reveled in — a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard. By successive bailouts and purporting to understand (to a higher and higher level of expressed confidence) a quickly changing financial system of growing complexity and leverage, he cultivated an ever-increasing (but unjustified) faith in the Fed’s apparent ability to fine-tune the American (and, by extension, the world’s) economy. Ironically, this development was occurring at the very time that financial innovations and leverage were making the system more brittle and less safe. He extolled the virtues of derivatives and minimized the danger of leverage and risky securities and dot-com stocks, all while he should have been putting on the brakes. It was not just the disappearance of vast swaths of the American financial system into unregulated subsidiaries of financial institutions, nor was it just government policies that encouraged the creation and syndication of “no-documentation” mortgages to people who could not afford them. It was also the low interest rates from 2002 to 2005, the failure to see the expanding real estate bubble caused by an unprecedented increase in leverage and risk, and the general failure to understand the financial conditions of the world’s major institutions.

Under Chairman Bernanke, the combination of ZIRP and QE completed the passage of the Fed from sober protector of a fiat currency to ineffective collection of frantically-flailing, over-educated, posturing bureaucrats engaged in ever more-astounding experiments in monetary extremism.

If you look at the history of Fed policy from Greenspan to Bernanke,you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin.

Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.

It is true that the CEOs of the world’s major financial institutions lost their bearings and were mostly oblivious to their own risks in the years leading up to the crash. However, as the 2007 minutes make clear, the Fed was clueless about how vulnerable, interconnected and subject to contagion the system was. It is not the case that the Fed completely ignored risk; indeed, several Fed folks made “fig leaf” statements about the risks of the mortgage securitization markets, as well as other indications that they appreciated the possibility of multiple outcomes. But nobody at the Fed understood the big picture or had the courage to shift into emergency mode and make hard decisions. In the run-up to the crisis the Fed was a group of highly educated folks who lacked an understanding of modern finance. After convincing the nation for decades of their exquisite grasp of complexities and their wise stewardship of the financial system, they didn’t understand what was actually going on when it really counted.

Ultimately, of course, as the system was collapsing and on the verge of freezing up completely, the Fed shifted into the (more comfortable and much less difficult) role of emergency provider of liquidity and guarantees.

All this background presents an interesting framework in which to think about what the Fed is doing now. QE is a very high-risk policy, seemingly devoid of immediate negative consequences but ripe with real chances of causing severe inflation, sharp drops in stock and bond prices, the collapse of financial institutions and/or abrupt changes in currency rates and economic conditions at some point in the unpredictable future. However, the lack of large increases in consumer price inflation so far, plus the demonstrable “benefits” of rising stock and bond markets, have reinforced the merits of money-printing, which is now in full swing across the world. In the absence of meaningful reforms to tax, labor, regulatory, trade, educational and other policies that could generate sustainable growth, “money-printing growth” is unsound.We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies. Read the 2007 Fed minutes and you will understand how disquieting is the possibility of such outcomes and how prosaic and limited are the people in whom we have all put our trust regarding the management of the financial system and the plumbing of the world’s economy.

Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible.

Central banks facing high inflation and/or sluggish growth after sustained money-printing frequently are paralyzed by the enormity of their mistake, or they are deranged by the thought that the difficult and complicated conditions in a more advanced stage of a period of monetary debasement are due to just not printing enough. At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame. The world’s central banks are in very deep with QE at present, and the risks continue to build with every new purchase of stocks and bonds with newly-printed money.

* * *

[And, as an added bonus, here are Singer’s views on gold:]

There are many current theories as to why the price of gold had been drifting down and then collapsed in mid-April. We are trying to sort out various possible explanations, but we urge investors to be cautious in their thinking about what circumstances would likely cause gold to rise or fall sharply. The correlations with other assets in various scenarios (risk on or off, economic normalization, inflation, the rise and fall of interest rates, euro collapse) may shift abruptly as the macro picture evolves. Many people think that if stock markets continue rising, and/or if the U.S. and Europe restore normal levels of growth and employment, then the rationale for owning gold is weakened or destroyed. This perception may be correct, and it is certainly a topic that is currently much discussed, but ultimately another set of considerations is likely to dominate.

The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as “real money”: gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable “must-have.” In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point.

Disprove Your Opinions on Gold

Gold BubblePure nonsense, April 24, 2012

By Bobnoxy

This review is from: Gold Bubble: Profiting From Gold’s Impending Collapse (Hardcover)

This book will no doubt go into the proverbial dustbin of history along with Dow 36,000. Ask yourself some honest questions and then compare your answers to this book’s entire premise.

Is gold in a bubble? Well, what do bubbles look like? Luckily, we have two recent examples, the housing bubble, and the tech stock bubble in the late 90’s. What did those look like?

To me, they looked like everyone was getting rich in techs stocks and flipping houses. Regular people were quitting their jobs and day trading or flipping houses full time. The average guy, the little guy, sometimes referred to as the ”dumb money” was making an easy fortune.

Now, how many of your friends own any gold and talk about it with you? How much do you own? The writer points to all the publicity around gold, like those ads telling people to sell their gold. And ever since gold hit $1,000, people were doing just that, selling their gold.

In a bubble, those people would be loading up, but they’re selling! The world’s central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

It would also be the first bubble to happen with almost no participation from the general public. This could be the weakest analytical book written this year. Just because the price of something is up does not mean it’s in a bubble.

If you look at the average selling price of gold in the year it peaked for the last bull cycle, 1980, or $660 an ounce, and look at today’s price, the average annual gain for that 32 years is about 3%. If stocks had risen by 3% annually for that long, would anyone be calling it a bubble?

Then look at our trillion dollar deficits and the growth in the Fed’s balance sheet, total government debt of $18.5 trillion when you include state and local debt that as taxpayers, we’re all on the hook for, and there’s your bubble, and the best reason to defend yourself by owning gold.


Thanks to a reader’s contribution: Here is a good article attached on bureaucracy and leading to misguided incentives.

Another reader:

I came across your website via your interview with Classic Value Investors. I like the way you try to help people learn the craft. Value investing is in principle not that difficult, as long as you have a good teacher. So well done!

On my own value investing blog ( I try to share my knowledge on the subject as well, but not per sé with case studies like you do. However, your approach is very informative for readers, so maybe I should try that some more.

I’ve also written a free eBook which explains three valuation models in simple words. Feel free to add it to your value investing resources if you like it:

Kind regards, Nick Kraakman,


Thanks for the above contributions.


9 responses to “Fiat Currencies vs. Gold; Paul Singer on Current Conditions; Readings

  1. I’d like to highlight the following phrase from Singer, a noted gold bull:

    ‘In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable.’

    It is a flashing red warning sign that gold’s price is falling while the fundamentals that supposedly support it are only ringing louder. While in value investing, we may perceive that as a buying opportunity (providing our analysis is correct), commodity investing, especially precious metal investing, is not the same.

    As Mr. Singer admits, there is no known or stable price of gold. Its price is simply a function of how much people are willing to pay for its perceived protection. The problem is that during the past 1.5 years, gold has protected us from nothing. Gold has fallen through bullish and bearish macro periods, it has fallen through massive new currency debasement operations throughout the developed world, it has fallen in the face of huge sociopolitical risks, and it has even fallen with the Fed openly proclaiming they will print money with no defined endpoint or scale.

    As you highlighted in bold, the reason why Mr. Singer owns gold is because throughout history, investors have turned to gold for the reasons he mentioned (a prospect I don’t exactly agree with, but we can use for reference). However, why does it have to be the case that this will remain true going forward, especially after investors have already amassed so much of the metal over the past 13 years? Just because investors turned to this asset in the past does not mean that they will do so in the future. Indeed, gold’s price falling in the face of all of these bullish fundamentals is telling you exactly that, that the market no longer perceives gold in the same way as it once did.

    I believe that rather than fighting this trend and waiting for the market to “figure things out”, we should take advantage of an investment bubble collapsing, or simply wait on the sidelines. If we all admit the price of gold is psychologically determined, then why couldn’t gold be at 1250 tomorrow? Or $1700? It is not an appropriate asset to be allocating passively to anymore, and that is why you are seeing massive outflows from gold ETFs. As these outflows continue, expect the price to continue to decline.

    • Just to clarify, technically, gold is not money due to legal tender laws. The government uses force to make people use its currency. So, you are correct, I can’t use a gram of gold to buy hamburgers at McDonald’s. But the world still views gold as money or else why do they waste money storing it under ground in bank vaults? Why are central banks buying gold?

      Gold is not wealth, it is not an “investment” Gold just allows for a stable exchange. I don’t view the price of gold going down but that exchange ratio of US dollars is going up. The dollar went up 25% vs. the dollar gold price since Sept. 2011 while declining 70% since 2001. If all is well, then whyvolatility. Gold supply only changes about 1% to 2% per year–making its supply stable thus a good medium of exchange. Only the demand changes cause price ratios to change.

      “investors” seem to be selling their gold via ETF probably for the reasons you mention–trend is down, stocks will never go down while the Fed exists, etc., inflation not a problem. While strong hands (Asian physical buyers) accumulate.

      But based on the massive mal-investment that I see, i want to hedge against the failure of the Phd. standard. The Central Banks have no clue as to what their actions will cause. Lowered interest rates below their natural rate (whatever that is…) only hurts productivity and capital formation. Price controls don’t work.

      Also, the Fed has NO EXIT plan so I have time on my side.

      • Over the past few years, central banks have been buying everything from US treasuries to Spanish and Italian sovereign debt to Japanese REITs and equity ETFs. I’m sure they don’t consider those to be “money” either. Moreover, I would never want to follow a central bank into what they are buying just because they are buying it, because they have clearly shown themselves to be inept. Lastly, how can central banks be inept when it comes to controlling inflation/the money supply, yet very smart when it comes to increasing gold holdings?

        I also must disagree with Asian investors being the ones we want to follow. These are the same investors who have bought up every existing condo in China in entire empty cities of concrete. Clearly, they are not the most value-oriented investors around. While Chinese and Indian investors have very strong cultural biases towards owning precious metals, their demand alone will not be nearly enough for gold to advance back to record prices. For that, we need true investment demand, which was rising briskly a couple years ago, but is now falling at an alarming rate.

        I agree with everything you are saying re the PhD standard and the Fed, but I think there are much better ways to hedge against it. I think first and foremost has to be real estate. If the Fed truly does lose control, and in the worst case scenario, the dollar is worthless, then land certainly will not be. If you are very scared, you could also purchase agricultural land, because in a barter system, food will be worth the most.

        The main problem I see in the gold market is that gold bulls’ reasoning has not changed in 2 years, while the price of the metal has been consistently falling. The same things that were true about gold in summer 2011 are even more prevalent today, yet the price is down 25%. A one or two month drop is one thing, but we are talking nearly 2 years now. Unless there is a very good explanation that I am unaware of for why the price has dropped over the past 1.5 years, there is a very real chance that the market no longer sees gold as a hedge against these events.

  2. John,

    The movement of the currencies against gold post 1966(?) is fascinating because of how they all moved in tandem in somewhat fixed ratios to one another. This seems to represent evidence that 1.) they were really all tied to one currency which was moving against gold (the USD?) and 2.) the CBs that controlled them were bent on maintaining arbitrary, fixed ratios from the past all the way down

    It would be fascinating for someone to dig into this and show what havok this caused just by CBs trying to “freeze history” like this.

  3. The best history on gold and exchange ratios that I have found is The Twighlight of Gold (1914-1936) by Melchior Palyi. The book provides a great economic/financial history of the period. Alas, I don’t know of a book that covers the 1966 period. Note the movement down prior to Nixon taking the US off the gold exchange standard. That example is why I am not for a gold standard. Why depend upon the government(s) to provide a check on themselves? Inevitably, the gold standard would be broken in an “unforeseen emergency.”

    Better to go to free market money with no legal tender laws. You don’t need government involvement in money. A fairy tale? Perhaps, but the only law of the universe it that Monopoly Central Planning ALWAYS fails.

  4. If the currency is stored in a savings account, I think they’ll get a decent amount of protection – not 100%, but we have to remember that currency isn’t something natural that was found on Earth. It’s really manmade, and so it shouldn’t be expected to preserve wealth on its own 100%, in my opinion. I’m personally quite alright with higher yielding savings account interest rates as hedging enough inflation exposure.

    If inflation runs 5% and interest rates are 3%, that’s good enough for me. I’ll invest in things outside of cash when opportunities present themselves – today’s rate environment doesn’t modify any urge to invest. That urge (read: impatience) will just lead to more trouble, and given that inflation post interest rates isn’t really all that horrible for me, I’m quite alright putting up 2% of real value loss per year.

    Just me though.

  5. What difference does it make if it’s the US currency that is backed by gold? Bitcoin is a fiat currency (as I understand it). Why couldn’t Kitco or the like, start a gold-backed version of bitcoin in order to increase the “liquidity” of gold and spur it’s use as a currency. Bitcoin has shown that currency does not need to be issued by a government.

    • Bitcoin is NOT fiat currency. Fiat means by government order. People are using Bitcoin for exchange freely but the government is trying to shut it down.

      I view Bitcoin as a money substitute like token money. It doesn’t have enough of a history of exchange to give people an understanding of its exchange ratio. Note the volatility.

      At least people are waking up the insanity of paper money backed by nothing but govt. promises.

      All gold or any monetary metal does is put the power of money back with the people and not with the government printing press. It doesn’t create wealth, it just allows for more secure exchanges and holding of wealth.

      Smarter folks explain it here: and Search for Bitcoin

    • A discussion on Bitcoin and gold

      old and Bitcoin: Currencies of the Future—James Turk
      Source: JT Long of The Gold Report (5/15/13)
      Europe, says James Turk, founder and chairman of GoldMoney, is in the midst of two crises—one in the banking sector, the other related to economic activity, and capital is needed to solve both. As to the allegedly strong dollar, Turk, in this interview with The Gold Report, suggests comparing it to the price of gold rather than other fiat currencies for a better picture. And the world’s newest currency—Bitcoin—has a lot in common with one of the oldest—gold.

      The Gold Report: James, from your perspective in Europe, is the region in as bad a financial crisis as it appears in the headlines here in the U.S.?

      James Turk: Yes, it really is. However, Europe is a big place, and you have to look at the individual countries one by one to understand the situation. Generally speaking, the Mediterranean countries are in the worst shape. Germany has been in the best shape, although recent economic data indicate it may be falling into a recession again. France is not quite as bad as the Mediterranean countries, but in economic activity, it is worse off than Germany and the rest of Northern Europe.

      TGR: What role does the euro play in all this, and where might the next crisis take place?

      JT: Most of the problems we have seen in Europe are not really euro crises; they are banking crises. That was clearly the case in Cyprus.

      The hot spot now is Slovenia, a small Alpine country that is part of the European Union and the Eurozone. Its banks are overleveraged and under scrutiny because of the number of bad loans they carry.

      The banks in Luxembourg and Malta are also very highly leveraged relative to the size of those countries’ gross domestic product (GDP). This concern follows on what happened in Iceland, Dubai and Cyprus, where the perception was that the banks were potentially vulnerable to “hot money” withdrawals due to the banks’ high percentage multiple to the country’s GDP. In other words, if depositor money were to flee, those banks might experience liquidity squeezes too big for the government to manage. That is what happened when the European Central Bank (ECB) pulled the plug on Cypriot banks after Russian depositors pulled out large sums.

      Economic activity is the second part of the problem. Italy is probably the most vulnerable at the moment, and that is saying quite a bit, given how bad off Spain is. But Italy has more political uncertainty.

      TGR: Italy has a new coalition government. Could that calm things down?

      JT: It could calm things down for a while, but there is so much difference of opinion as to what is needed to solve Italy’s problem, the various groups are too polarized. I do not see this coalition government lasting very long.

      TGR: What will it take to cure this banking crisis?

      JT: Capital. The banks are overleveraged and have too many bad assets on their balance sheet. Capital has been wiped out, even accounting for reserves set aside by the banks. That was clearly the case in Cyprus and is the case in most other countries.

      The banks look solvent because the ECB is keeping them afloat with liquidity. If the ECB removes that liquidity, as it did with Cyprus, it will soon become apparent which banks are truly insolvent. Bank crises occur overnight for that reason: When the liquidity is gone, the bank closes up because it is not solvent. It lacks quality liquid assets that can be sold into the market to raise cash to meet depositor withdrawals.

      Capital cannot be created out of thin air, which is something that politicians have yet to learn. They think that by borrowing more money from the market they can save the banking system. But they are just adding fuel to the fire because most European countries are already overleveraged.

      TGR: Looking to the east, Japan just announced its own quantitative easing (QE). Will it win the currency race to the bottom?

      JT: We seem to have a horse race going on that no one should want to win. Which is going to the fiat currency graveyard the quickest: the yen, the dollar, the euro or the pound? Right now, Japan is leading the race with its debasement of the Japanese yen through QE and government spending programs. This is astounding because when you look at economic activity around the world, Japanese GDP growth is better than most, and it has one of the lowest unemployment rates in the industrialized world. Japan was in pretty good shape until its new prime minister took over and laid out his policy to debase the yen.

      TGR: Why has the dollar remained so strong despite QE here?

      “Capital cannot be created out of thin air, which is something that politicians have yet to learn.”
      JT: Is the dollar really strong? When you look at the dollar against gold—which is what it should be measured against—the dollar has lost 16% per annum on average for 12 years in a row. At any moment, the dollar might look OK compared to the euro or vice versa, but you have to measure the dollar against something meaningful. I do that by looking at the dollar relative to the gold price.

      I expect this multi-year weakness in the dollar to continue because, just as in Europe, Japan and in the U.K., the U.S. government and the Federal Reserve are following destructive monetary policies that are eroding the dollar’s purchasing power.

      TGR: Will that lead to hyperinflation and is there a tipping point for that to happen?

      JT: I think it will lead to hyperinflation. There have been signs for quite a number of years.

      You have to keep a couple of things in mind. One is that the inflation numbers released by the U.S. government and most governments around the world have been massaged and doctored to make inflation look lower than it really is. I rely on the inflation statistics that John Williams of puts together. Right now inflation in the U.S. is running about 9.5%. For example, commodity prices and the cost of things like property taxes and insurance premiums have been running much higher than what the U.S. government reports inflation to be.

      Second, hyperinflation always comes from one cause: excessive government spending, forcing it to borrow. When a government borrows, it can only borrow what the market is willing to lend or what the market has the capacity to lend. If the government is borrowing more than the market is saving, it is, by definition, debasing the currency.

      When no one is willing to lend to the government, it tells the central bank to buy its debt and turn it into currency. The central bank then puts this newly “printed” money into the government’s checking account, which the government then spends.

      We are headed for hyperinflation—not necessarily the paper-currency hyperinflation that occurred in Germany’s Weimar Republic or in Zimbabwe—but a deposit-currency hyperinflation, like Argentina 12 years ago. There is not a lot of paper currency being printed, but there is a lot of money in bank accounts; this is currency that people spend with checks, wire transfers and plastic cards.

      TGR: Recently, you talked on the “Keiser Report” about Bitcoin. Does it matter if digital currency has no value beyond accounting? Are there parallels between gold and Bitcoin?

      JT: Bitcoin is not only a digital currency, it is a crypto-currency, a technological innovation we have not seen before.

      The parallels to gold are quite interesting. I did a study recently for the GoldMoney Foundation showing that the aboveground stock of gold grows by about 1.8% per annum, year after year after year. That number is approximately equal to world population growth and new wealth creation, so gold’s purchasing power has been consistent over long periods of time. Gold mining does exactly what Milton Friedman recommends in his K-rule: it grows the gold money supply by the same amount year after year after year.

      Bitcoin is designed in essentially the same way, but instead of mining the earth you are mining mathematical formulas to arrive at a very consistent growth of Bitcoin until 2040, when approximately 21 million Bitcoins will be in circulation.

      “Bitcoin is not only a digital currency, it is a crypto-currency – a technological innovation we have not seen before.”
      Bitcoin and gold each have advantages and disadvantages. The piece of gold you hold in your hand has 5,000 years of history. Bitcoin has maybe four years of history. On the other hand, because you can hold gold in your hand and store it in vaults, it can be confiscated by governments. Bitcoin, because it is a crypto-currency based on mathematical formulas stored in computers all around the world, cannot be confiscated.

      Bitcoin has value to people who understand that confiscation is a real risk. In the last century, Lenin, Mussolini, Hitler and Roosevelt all confiscated gold to increase the power of the state. Once the state controls the money we use, it can control economic activity, which explains what we are seeing today around the world.

      Crypto-currencies are here to stay and should be looked at closely by everybody, particularly those who understand sound money and appreciate the value and usefulness of gold.

      TGR: Is Bitcoin an investment vehicle?

      JT: No, because neither gold nor Bitcoin generates cash flow. Both are sterile assets. Investments generate cash flow. You put your money at risk in the hope of getting cash flow from your investment.

      Gold is money. When the price of gold goes up, you are simply taking wealth that is already created and in the hands of people who own fiat currency, and transferring that wealth to people who own gold.

      The same concept applies to Bitcoin. Bitcoin is money, not an investment. Its exchange rate can go up or down just like the price of gold. In that sense, Bitcoin could be called a store of value just like gold. The difference is that gold has a 5,000-year history; Bitcoin is much younger. We will have to see how Bitcoin plays out as a store of value in the years ahead, but regardless, Bitcoin is a useful currency because it makes possible low-cost global payments. It is a technological advancement that leaves bank payment systems in the dust.

      TGR: Will governments see Bitcoin as a threat because it is an alternative currency not under their control?

      “The rule of thumb is to have gold bullion equal to your age. A 65-year-old should have 65% of his or her assets in gold bullion; a 25-year-old can have 25%.”
      JT: They may see it as a threat, but there is nothing they can do about it unless they seize every personal computer in the world. People are studying it, becoming familiar with it. Some day there may be a Bitcoin2 or a Bitcoin3 that is even better than the original.

      That is the beauty of technology. Technology enables society to move forward and improve everyone’s standard of life. Crypto-currencies may be the technological innovation that gets us out of our current monetary malaise arising from state control of money and enables us to return to vibrant economic activity that results when we use sound money.

      TGR: Based on your Fear Index and the Gold Money Index, would you explain the difference between value and price?

      JT: Price is the measurement we use when we enter into an exchange with someone else in the marketplace. Value is what something is truly worth.

      In other words, I might have a house worth $500,000, but I sell it at $400,000. The purchaser is buying it at a price below its true value. On the other hand, I might sell that house at $600,000, in which case the purchaser is buying the house above its true value.

      To correctly analyze gold, we must look at its value. We can measure gold’s value by comparing it to national currencies.

      I use the Fear Index to compare gold to the dollar and the Gold Money Index to compare gold’s role in international trade and finance against all of the foreign exchange reserves held by the world’s central banks. Gold is undervalued by both of those measures. Even though its price has been rising for 12 consecutive years against the U.S. dollar, it remains undervalued because the dollar itself is being debased at almost as rapid a rate as the gold price is rising.

      The other thing about gold is that its value is not only expressed numerically. Gold is money that is outside the banking system. Because it is tangible, it has no counterparty risk. It is not money that depends on a bank or a government promise.

      Given what happened in Cyprus and the fragility of many banks around the world, I think everybody should have some gold to protect themselves from the eventuality of a much larger banking crisis than what we have seen so far.

      TGR: In light of all the volatility of gold and silver recently, how are you adjusting your portfolio? What roles do cash, physical gold, mining stocks and exchange-traded funds (ETFs) play?

      JT: When you buy gold, you have to first identify your objective. Do you want to profit from movements in the gold price, or do you want a safe haven as protection from monetary and banking turmoil? You want the right tool for the right job, which depends on your objective.

      If investors want a safe haven, physical gold with no counterparty risk is the way to go—you want to hold gold bars and coins. If investors want to trade to profit from fluctuations in the gold price, then you can look at what I call paper-gold instruments. These would be futures, options and ETFs. In this case, you do not own gold; you own exposure to the gold price and that exposure comes with counterparty risk.

      I recommend focusing on gold as a safe haven: own physical gold and leave paper-gold to the professional traders and the speculators. Gold is part of the cash—the liquidity part—of your portfolio.

      Mining shares go into the investment part of portfolios. Investors need to look at mining shares using the same process they do when buying any equity. What is the quality of management? What does the balance sheet look like? What do the assets look like? What is the political risk where the company operates? And so forth.

      If you are prepared to shoulder those investment risks, you might then decide to have some mining shares in your portfolio as well. Generally speaking, I have never seen mining share prices this undervalued in relation to the cash flow they are generating, and, as a result, many mining companies have increased their dividends. If I am correct that the gold price will go much higher, I think mining company shares will rise much higher as well.

      TGR: Is the TSX Venture Exchange a bargain basement right now?

      JT: Everything is pretty much on sale. The question is when the mining shares go up, which ones will go up first?

      There are a couple of characteristics that may give us a clue. Good dividend payers with secure cash flow will probably rise first. I would stay away from any mining shares that have any hedge positions, because those hedge positions will cut into profit as we have seen in the past.

      I also would look to the mining shares with management teams that have proven themselves. There were a number of disasters over the past few years caused by companies focusing on growth rather than cash flow. They overpaid for investments and diluted their shareholders. Many of those executives have left and their successors have, I hope, learned the lessons of those departures. You always have to look at management first and have complete confidence in management before investing in any company.

      TGR: Some people have predicted that hundreds of junior miners will be gone by year-end. Do you agree, or are you more optimistic?

      JT: It is possible that a lot of them will go by the wayside and disappear, simply because capital is very hard to come by today. A lot of these little companies are the explorers looking for a resource, but even those that have a resource cannot always find the capital they need to develop it.

      A lot of the smaller companies are at bargain-basement prices, but they come with a lot of risk. The less risky play would be companies that have a dividend record, a good management team and a strong, solid cash flow that will likely continue into the future.

      TGR: Based on the five standard deviation decline that occurred in mid-April, what would the technical analysts predict for the price of gold this summer and the rest of 2013?

      JT: The present drop in prices is very similar to what occurred in 2008, although it is not as severe a percentage decline. And remember, within one year of the low of 2008, gold made a new record high above $1,000/ounce ($1,000/oz) and silver more than doubled within 12 months.

      I think history will repeat. Within the next 12 months a new record high in gold above $2,000/oz is possible, and I think silver will double.

      TGR: Any last advice for investors looking to preserve or increase their wealth?

      JT: When you are preserving wealth, you want a safe haven. Physical gold has been the best safe haven over the past 12 years, and I expect that to continue. You just need to make sure you store it with a professional storage firm where you have the assurances of integrity, that your gold is safe.

      If you want to grow your wealth, you have to focus on investments, not the money in your portfolio. Here, you might want to look at the mining companies because there are some very good opportunities because of today’s low prices.

      I guess it comes down to a question of age. If you are older, you want to be more conservative and take less risk. If you are younger, you might want to take more risk. For me, the rule of thumb is that you should have gold bullion equal to your age. A 65-year-old pursuing a less-risky portfolio strategy should have 65% of his or her assets in gold bullion and the rest in various investments. A 25-year-old can have 25% of his or her assets in gold bullion and invest the remaining 75%, which means the portfolio has less liquidity and more risk.

      Whether you are the 65-year-old investing 35% or the 25-year-old investing 75%, look at the gold mining shares because they are extremely undervalued right now. I do not think the gold mining industry is going to disappear, for the same reason that gold, with its 5,000-year record, is not going to disappear.

      TGR: Great advice. Thank you so much for your time.

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