Gold is becoming a new linchpin for global trade… And it’s going to be in digital form… In the mailbag: Is gold the only financial asset that’s not somebody else’s liability?
Yesterday, we began to explore what I (Chris) believe is shaping up to be the biggest financial story of our time.
In short, the world is moving away from the dollar-based money system we’re on now… and back to one with gold as its linchpin.
It’s one of the big-picture developments Nick Giambruno has been tracking over at our Casey Report advisory. (Paid-up subscribers to that letter can catch up in full on Nick’s call here.)
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As we showed you yesterday, Nick says it will trigger one of the biggest gold manias in history.
And he believes it will rival the 2,300% gain for gold that followed the last monetary paradigm shift – the end of the gold standard in 1971.
Using gold as money is cumbersome in the digital age.
Jason Zweig, the long-running personal finance columnist for The Wall Street Journal went as far as to call gold a “pet rock.”
But thanks to the rise of the crypto economy – a big theme on our radar at The Daily Cut – it’s now possible to transact in gold… digitally.
And as we’ll show you in today’s dispatch, this is one of the reasons gold will be used more and more as money again.
Over the past 100 years, the world’s money system has collapsed… and been replaced… three times.
The first two shifts happened when governments ended gold backing to fight World War I and World War II.
The third was the “Nixon Shock,” on August 15, 1971.
That’s when President Nixon interrupted the popular cowboy TV show Bonanza to announce that he was replacing dollars backed by gold with “fiat” dollars.
Legacy Research cofounder Bill Bonner calls it one of the “key dates” in financial history…
Fiat currencies don’t have any commodity backing them. So governments can create them at will at little or no cost (depending on whether we’re talking digital money or the physical kind).
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But now, a fourth paradigm shift is underway.
As we told you yesterday, central banks are leading the way.
Global central banks – led by U.S. rivals Russia and China – are scooping up gold faster than they have since 1971.
This extra demand is so strong that, last year, gold buying exceeded new supply.
Meanwhile, the Chinese have set up what Nick calls the “Golden Alternative.” It’s a new trading system that allows oil producers to sell their oil – normally traded only in U.S. dollars – for gold.
The U.S. uses the dollar’s reserve status to economically bludgeon its rivals when they step out of line.
The dollar is the big boy on the block. So if you cross paths with Washington, you’ll quickly find yourself locked out of the SWIFT cross-border bank payments network.
Countries that get hit this way can no longer easily buy key commodities traded in dollars – such as oil, copper, and iron ore. They’re also locked out of large swaths of international trade. And companies can no longer access U.S. dollar funding.
And as Legacy Research cofounder Doug Casey has been telling his readers, America’s rivals aren’t keen to leave themselves vulnerable to this kind of economic financial warfare.
That means any nation Washington has a beef with will happily embrace alternative systems that cut out the need for U.S. dollar payments.
And it’s a growing list. Here’s Doug with more…
Since the early 1970s, the dollar has been used the way gold once was – it’s the world’s currency. The problem is that the U.S. has exported perhaps $10 trillion – but nobody knows – in exchange for good things from around the world.
It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy. But at some point quite soon, dollars won’t be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card.
Doug’s right. And China isn’t the only country turning its back on the dollar…
Last week, the prime minister of Malaysia, Mahathir Mohamad, proposed a common trading currency for East Asia that would be pegged to gold.
Here’s how he put it at the Nikkei Future of Asia conference in Tokyo…
In the Far East, if you want to come together, we should start with a common trading currency, not to be used locally but for the purpose of settling of trade. The currency that we propose should be based on gold because gold is much more stable.
In short, more countries are turning their backs on the U.S. dollar. They’re moving to gold as an alternative international currency for trade.
And that all feeds more demand… and higher prices… for gold.
First, you can’t send physical gold quickly anywhere in the world, like you can send your digital dollars. It’s heavy. And you have to get it on an airplane and a truck.
Second, to store gold, you need expensive vaults or safes. Or you need to hide it on your property somewhere. And that’s hardly convenient.
That’s where gold-backed cryptocurrencies come in.
You combine the gold with the distributed ledger – or “blockchain” – technology that tracks cryptocurrency transactions.
Now, you have a new gold-backed currency that rivals the dollar in terms of reach, speed, and cost of transactions.
Without getting too far into the weeds, gold-backed cryptos allow you to send and receive gold in digital form via an app on your smartphone.
That’s because each gram of digital gold is backed by physical gold in a vault somewhere.
And as Nick has been telling Casey Report readers, this will bring gold one step closer to its dominant role as money again. Nick…
Gold-backed cryptos take the best attributes of gold and the best attributes of cryptos and combine them. I can’t think of two other asset classes that have as many synergies. The whole is worth much more than the sum of the parts.
With cryptos redeemable for gold, we can now instantly send anyone anywhere in the world small or large amounts of gold – reliably and without interference. It’s nothing short of a monetary revolution.
Gold-backed cryptos are going to make using gold as money even more convenient for the average person and business. Anyone with a cell phone now can use gold in a way that was not possible before.
And Malaysia isn’t the only country looking for a new currency backed by gold…
Well, the rumors are that the Kremlin will use this gold to back a crypto version of the Russian currency, the ruble.
The Russian ruble by itself is a currency minnow. Russia’s economy is only 8% the size of the U.S. economy.
But a Russian cryptocurrency backed by gold would be different.
In 2009, Russia had about 600 metric tons of gold. Today, Russia has 2,183 metric tons – a 264% increase.
This gives Russia a gold-to-GDP ratio over three times that of the U.S.
And Russia is already considering a gold-backed crypto at the highest levels of power. As the head of the Russian central bank put it recently in a speech in Russia’s national parliament, the Duma…
When it comes to international payments, we will of course consider [the] proposal… of gold-backed cryptocurrency.
We don’t expect to see a gold-backed crypto ruble this year… or even next year. This plan is still in its early stages. But it’s not hard to see where this is headed.
China… Russia… Iran – and any other country that wants to avoid Washington’s economic warfare – will all gladly embrace digital gold as an alternative to the dollar.
And that’s a game changer for gold… and gold prices.
Tomorrow, we’ll turn to another gold expert at Legacy Research – globetrotting geologist Dave Forest.
He’s homed in on a trend in the mining sector that he believes will send certain gold companies soaring. Stay tuned…
Today, your fellow readers are talking about gold and cryptos, too. First up, one reader thinks about gold’s merits – and its shortcomings…
I have heard Doug say several times that “Gold is the only financial asset that is not simultaneously somebody else’s liability.” This is very interesting to me.
I think the statement could only be 100% true if you physically possessed gold. Even gold held at a holding company would seem to break this rule a little bit, because then, you simply don’t know if they would ever restrict your access in one form or another.
– Scott E.
Meantime, last week, some of your fellow readers were concerned about an organization called the FATF… and a “travel rule” it wants to impose on cryptocurrencies.
If you’re like reader John D. below, you’ll want to read Friday’s Cut, where we showed you what the FATF is… and what it means for cryptos…
Thanks for the heads up regarding FATF. This was the first time I’d read anything about it.
– John D.
Finally, another reader turns back to the U.S.’s recent sanctions on Iran, after we passed on Doug Casey’s thoughts yesterday…
The government is not doing us a favor in the win-lose issues. It is becoming the world’s biggest bully! They should leave Iran alone. You keep poking someone with a stick and, sooner or later, they are going to react for better or worse – most likely a serious conflict.
It would be really nice if we could change all politicians every two terms. They have no business being in office all of their working life. The majority has not worked a day in their life!
– Ralph C.
What applications of crypto are you most looking forward to? Being able to transact in sound money across continents – instantaneously and with almost no fees? Or everyday conveniences, like buying coffee?
Write us at [email protected].
Regards,
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Chris Lowe
June 4, 2019
Barcelona, Spain
IN CASE YOU MISSED IT…
We’re witnessing the biggest inflection point in human history…
Technologies being built out today will transform society in ways we can’t imagine. And a handful of small tech companies will make investors 10 times their money…
Legacy Research’s go-to tech analyst, Jeff Brown, is sharing the details on June 12. He’ll reveal his top four predictions for the tech of tomorrow…
And he’ll give you the name of his favorite early-stage tech company, live on camera. Reserve your spot right now.
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