Gold Becoming Money Once Again

GoldSeek reports about a new stage in gold's evolution.

(emphasis mine)
[my comment]

A new stage in gold' s evolution?

Two professors at Prince Sultan University in Riyadh, Saudi Arabia, H. Assenov and K. Petrov, have published a paper with the title: A New Stage in Gold' s Return to Money (see References below.) In this paper they put forward the hypothesis that the market monetizes the one ounce standard gold coins regardless of shape and country of origin, as long as they have the right weight and fineness, as witnessed by the uniform price at which they are traded. They say that this is a new phenomenon that first appeared in December, 2008, the same time when gold backwardation first appeared as a threat to close down Comex warehouses. It means a great leap in the marketability of these coins due to perfect fungibility. Now a much larger pool of coins backing the trade is available. Both buyers and sellers dismiss the coins' idiosyncracies that would be of interest to numismatists and collectors. The authors suggest that this is a proof that gold' s remonetization is in progress. Gold is not yet money, but it has cleared one of the most serious hurdles towards becoming money. The market for the standard gold one-ounce coin, 999 fine, is no longer fragmented.

The authors make no reference to the fact that the Royal Canadian Mint is de facto open to gold as shown by the activities of a private Canadian firm. This fact, in my opinion, plays a large part in the phenomenon the authors describe: the uniform valuation of all standard gold coins. However, it is significant that they noted the simultaneous appearance of backwardation in the December gold future contract at the Comex. They also quote Carl Menger' s theory on the origin of money, that is, the rise of indirect exchange. Both the ugliest and the most beautiful gold coins are traded in indirect exchange strictly by the quantity and quality of metal content, completely disregarding the outward appearance of the coin. Whether the coin features the effigy of a bearded man or a kangaroo is of no consequence. The authors conclude their paper as follows:

Under the current financial order we use paper tickets with the picture of a bearded man that are currently printed in the trillions by another bearded man. Those tickets have had no backing for many decades, so there has been no restraint in their printing. Up until recently there has been a modicum of self-restraint in the printing process. However, since the Summer of 2008 all restraint has been thrown out of the window by the bearded man, a.k.a. Bailout Ben, who has indulged Congress and the Bankers in an historic multi-trillion dollar printfest. In response, common-sense people have rushed into gold as a store of value. Now that the value of gold is driven entirely by its purity and quantity, it is only a matter of time before gold is used again as a medium of exchange. Gold coins are no longer a numismatic delight, nor do they appear to be a Barbarian Relic. Gold is becoming money once again. Dollar holders beware!

Sprott Money Ltd.

I tease my readers' curiosity no longer. I disclose that the Canadian firm that has harnessed the Royal Canadian Mint to change the course of history is Sprott Money Ltd., established in 2007. The inspiration came from its founder, Mr. Eric Sprott himself. I salute him here as a man of great insight and courage. He firmly believes that gold should again be the international currency, by the choice of the people. He believes that the U. S. economy is in a state of total systemic failure [agreed]. He says that we are in a depression today. He points out that the average bank is leveraged 25 or 30:1. He does not beat around the bush: he says that in a true mark-to-market, probably no bank would have any tangible capital left. He does not think that any economy that is paper-based can be insulated against the contagion of debasement that is the hallmark of the U.S. dollar. [not only the dollar, hyperinflation in the yuan will weaken all currencies too.]

In a recent interview (see References below) Sprott stated that during the past three years his organization has converted a lot of gold bars to gold coins at the Royal Canadian Mint, and then he went on:

We have lots of inventory; we are not seeing any signs that we are going to eat through our inventory of coins. But I always do worry that I' ve got to be able to buy the 400-ounce bars back, too. So we' ll see. If it happens that I can' t buy the bars back, I don' t think I' ll be selling the coins. [in other words, when sellers of 400-ounce bars disappear, the sellers of gold bullion disappear too.]

I have included this quotation for its value as it so closely relates to the problem of backwardation in gold. When Sprott cannot buy any more 400-ounce bars, that' s it: the curtain has fallen on the Last Contango in Washington. Backwardation is here to stay. And you will know it immediately because Sprott Money Ltd. will simultaneously withdraw its offer to sell Canadian Maple Leaf coins to retail customers. Not for sale at any price quoted in dollars, whether Zimbabwean or U.S.

We need lots of imitators for Sprott and lots of imitators for the Royal Canadian Mint, if we want to shorten the painful death-watch of this reactionary episode in the history of money, the experiment with the paper dollar backed, as it is, by the greatest collection of weapons of mass destruction: debt and thermonuclear warheads — if not much else.

My reaction: The two central points to take away from this article are:

1) The market for the standard gold one-ounce coin is no longer fragmented. Both the ugliest and the most beautiful gold coins are traded in indirect exchange strictly by the quantity and quality of metal content, completely disregarding the outward appearance of the coin.

2) Now that the value of gold is driven entirely by its purity and quantity, it is only a matter of time before gold is used again as a medium of exchange.

Conclusion

At some point this year, there will a panic which will shut down the gold market. Large purchases by wealthy investors shifting their wealth into gold will cause the quantity of 400-ounce bars to disappear, which will in turn cause sellers of gold coins to cease sales. Gold will not be available for sale at any price quoted in dollars. When this happen, the dollar will enter a freefall, losing all value.

It is very important to recognize here that such currency collapses are permanent events. That is to say the value lost to hyperinflation will never return, no matter how long investors wait. So when you see gold prices hit $1000, $2000, or $5000, realize that this isn't a bubble in gold, but a dollar collapse.


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0 Responses to Gold Becoming Money Once Again

  1. Gary says:

    "the Royal Canadian Mint is de facto open to gold"

    What does this mean? Thanks

  2. Robert says:

    I've seen this happening with silver too.. if you look on ebay scrap silver of any sort is selling above the 'market' price.

    I think it's at the point where you could have a viable business buying large silver bars thorugh the comex and sawing them into pieces with a hacksaw for resale as scrap.

  3. Anonymous says:

    Well gold is going up and up today.. where is the best place to get gold coins now?

  4. dashxdr says:

    I'm happy with California Numismatic Investments http://www.golddealer.com for purchasing precious metals.

  5. Anonymous says:

    Hey Eric,

    That "Big Inflation" article that disinter posted has an EXELLENT explanation of inflation/deflation that might help clarify things for a certain OTHER poster who often tends to disagree with you.

  6. Anonymous says:

    I disagree with the statement that there will be no bubble in gold.

    Although gold functions in the capacity of money it is not TRUE WEALTH. True wealth is varied. An example of true wealth would be a pair of shoes, you cant wear gold shoes, so gold is valuable as a store of wealth to be used as needed for REAL GOODS currently or most importantly in the future.

    Gold will rise as people try to salvage their wealth from a crashing dollar, but like all panics, they'll overshoot and raise the price of gold above its historical valuations.

    Golds HISTORICAL ratio against things like oil, or even real estate, will skyrocket as speculators jump into the fray, not to salvage wealth but to "play" and the market will feed itself into a frenzy.

    You'll see lines at coin shops, "Joe the plumber types" buying gold futures, etc.

    At that point, when gold gets that heated and the historical ratios get skewed, it will be time to divest from gold and into other beaten down investments (probably real estate since it led the way down it'll probably lead the way up.)

    So although you will see a crashing dollar with gold prices spiking, gold is not immune from speculative bubbles (on the downside and on the upside) just ask anyone who bought gold in the late 70s.

  7. Numonic says:

    lol compared gold to shoes. I understand what you're saying but in the fundamentals of supply and demand gold will always be more rare than shoes. And oil is no where near as rare as gold/silver plus if it ever does get that rare we'll use alternative forms of energy. But i understand what you're trying to say. It's like the stranded island situation. A person on a stranded island will value food over gold/silver. But is the world headed for any shortage in food, clothing and shelter. Was Malthus correct? I don't think so.

    Gold Futures in an environment with no credit?

    I don't know. I think the lesson of the dollar/fiat currency collapse is that debt is bad.

    As far as values of other things rising in relation to gold/silver, I don't know. That would mean there'll be more demand and less supply for those other things than for gold/silver. I know the opposite is happening now and will be happening for some time but as far as for later I don't know. We'll see.

  8. nonymous said...
    Gold will rise as people try to salvage their wealth from a crashing dollar, but like all panics, they'll overshoot and raise the price of gold above its historical valuations.

    Golds HISTORICAL ratio against things like oil, or even real estate, will skyrocket as speculators jump into the fray, not to salvage wealth but to "play" and the market will feed itself into a frenzy.

    Gold SHOULD go above its historical ratio. Consider that deflation occurs when the economy is growing faster than the supply of money, and the world economy has been growing much faster than the supply of gold for decades. This means that the purchasing power of gold has a lot of catching up to do, and, when all is said and done, I expect gold prices to stabilize well above their historical ratios.

    Judging gold by "its historical valuations" doesn't give an acurate idea of where gold prices should be, because it doesn't take into account this relationship between the world economy and the supply of gold. (I do agree that gold prices will probably overshoot to upside though)

    So although you will see a crashing dollar with gold prices spiking, gold is not immune from speculative bubbles (on the downside and on the upside) just ask anyone who bought gold in the late 70s.

    While you may be right about gold prices eventually becoming a bubble, when gold prices take off this year, they will not fall again, at least in terms of dollars.

  9. Anonymous says:

    But gold most likely will fall in relation to oil.

    Oil got way ahead of itself breaking its historical average of 10 barrels of oil to one oz of gold. Gold got to 1000 and oil almost got to 150 for a ratio of 6.5 . Now oil is at about 20 barrels per oz. so oil is either undervalued (my opinion) or over valued (deflationist view).

    I think golds reaction the last couple of months (up then down then up) signals that the market is still undecided and could go either way. Remember the market forces are deflationary there is NO question the market wants to deflate. The remaining piece of the puzzle is what is the GOVERNMENTS reaction going to be. If it takes aggressive action (again my opinion) we'll have inflation if not then the opposite will happen.

  10. Numonic says:

    We are not in deflation. A credit contraction is not deflation, it is part of hyperinflation. People are compensating for the loss of purchasing power by stopping the extension of credit. The Stock Market is nothing but debt. People are running away from debt. A loss of confidence in debt. That is hyperinflation. More money is being printed than ever before. More people are running to the safest asset(gold and silver) than ever before. The cumulative inflation rate over three years approaches, or exceeds, 100%. We are experiencing hyperinflation NOT deflation. The only reason prices are not showing it is because of the dollar's peg to the Asian currencies with Trade Surpluses and the flight to quality, the last 3 safest are US Treasuries, the Federal Reserve Note then finally Precious Metals. The treasury rally will not last and neither will the Fed Note rally. People are fleeing to the safest asset Gold and Silver. This is hyperinflation and we are experiencing it with this stock and eventually bond market crash. The government can't do anything but make it worse. The government doing nothing will not stop the flight to quality, the damage is already done. It's too late. People have awoken to realize debt is bad and are running away from it. Govt. letting the debt default will cause people to stop lending and the govt. printing money to try to stop defaults will cause people to stop borrowing by causing lenders to compensate for a lack of purchasing power with more regulations on what it takes to be able to borrow which many people will not be able to meet. The govt. is powerless in this loss of confidence in debt. This is what hyperinflation is, it is different from regular inflation because it involves this loss of confidence in debt. Hyperinflation is here and the last ball to drop will be the Treasury Bonds and Fed Notes. This is the opportunity of a life time and we have these generous Asian nations to thank so take advantage and buy silver and gold while they are still cheap. The Asian nations can only hold the US above water for so long until they realise we are too heavy and that their attempt to save us is futile and will only cause them to drown along with us if they continue to try to hold us above water.

  11. Anonymous said...
    But gold most likely will fall in relation to oil.

    Oil got way ahead of itself breaking its historical average of 10 barrels of oil to one oz of gold. Gold got to 1000 and oil almost got to 150 for a ratio of 6.5 . Now oil is at about 20 barrels per oz. so oil is either undervalued (my opinion) or over valued (deflationist view).

    Long term (3+ years out), gold will likely fall in relation to oil (because of peak oil and rising demand). However, short term (over the next year) oil is pretty much guarantied to fall against gold. The main reason for this is that the dollar's collapse is going decimate the US's demand for oil (most Americans will not be able to afford 20+ dollar gas). Since the US now consumes 25% of the worlds oil and since there is a huge pile of oil being stored in tankers around the world, the oil market will remained oversupplied for at least the next year. Eventually, Demand from China and other emerging markets will change this, but short term the fall in US demand for oil will overwhelm all other factors.

    So, for the next year at least, gold is a better investment than oil. However, both oil and gold will rise enormously in terms of dollars.

    I think golds reaction the last couple of months (up then down then up) signals that the market is still undecided and could go either way.

    The gold's reaction over the last couple of months (up then down then up) could also be attributed to government manipulations. The best evidence of intervention in precious metals is what happened with silver last summer. Over the span of a few weeks, two commercial banks sold silver futures in excess of all known supplies. Either these two commercial banks were displaying monumental stupidity or they were acting on the behalf of the fed. The large short positions of commercial banks in gold is also evidence intervention (or incredible stupidity).

    Remember the market forces are deflationary there is NO question the market wants to deflate.

    Except that gold tends to do well during periods of deflation. Its purchasing power increased 17 times during the great depression.

    The remaining piece of the puzzle is what is the GOVERNMENT'S reaction going to be.

    Going to be? I think that what happened last summer with silver shows that government has already reacted. What's happening now is that the government is losing control over precious metals. Gold wouldn't be back above 900 if the government could help it.

    If it takes aggressive action (again my opinion) we'll have inflation if not then the opposite will happen.

    I disagree. The outcome right now is set, and whatever the US does is irrelevant. China is headed towards hyperinflation, which will force it to drop its dollar peg and sell off its dollar reserves. This will crash the dollar, causing hyperinflation. There is nothing the US can do to prevent this.

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