Derivative Illusion

Posted 22 Oct 2008

Often the assertion is made that there is ‘not enough’ gold to return to a gold based monetary system.  The counter-argument is that there is too much paper.  The picture above illustrates the point perfectly.

The dollar based monetary system is the largest bubble in the history of the world.  Gold has been, is and will always be the center of the financial universe. In 1971, most people were too gullible and accepted the thinking that the sun (gold) revolves around the earth (FRN$).

Today by luck I ran into a friend who was the Chairman and founder of a respectable bank in Nevada.  He is extremely well connected.  We spent some time talking shop.  He remarked that ‘oil is going to $50 and gold to $500’ and in about two years that gold will probably begin performing well.

  I would not be surprised if both assertions are proven correct over time because of the nature of the great deflationary credit contraction as gold abuts T-Bills.  Nevertheless, my bullion is not for sale.

Why is that?  Because the current monetary system is an illusion.  The gold market is tiny compared to the Tower of Babel that has been constructed on top of it.  The pricing mechanism is completely broken.

My friend, who often teases me for being a ‘gold bug,’ does not understand some basic monetary science and theory.  He views gold as a portfolio asset; I view everything else as a portfolio asset.  We hold opposite views about what is the center of the financial universe. I launched a calculated rebuttal about credit default swaps vaporizing firms. 

He revealed his ignorance by responding, ‘Yes, is there going to be any end?’  I responded, ‘There are $1,400T of derivatives and central banks use some of them to manipulate the gold price.  The great thing about gold is it is either in my hand or not and $850B of it cannot just be created out of thin air.’

I then briefly explained the future of currency, GoldMoney, and how it eliminates counter-party, settlement, credit, payment and Herstatt risk from the medium of exchange and store of value.  The change of the monetary system is only beginning. 

Change always encounters pugnacious opposition from the status quo Establishment.  However, like the Catholic Church was powerless against the ideas of Copernicus and Galileo so likewise is the Establishment powerless against the ideas of digital commodity money.

Most importantly digital gold will ultimately explode onto the international monetary scene whether bankers or governments like it or not!  However, there are still some ideas that need to be implemented.  When the systems are implemented and the time is right then digital gold will go viral and the illusion will dissipate.

My strategy is to acquire gold on a consistent regular basis with a constant percentage of proceeds from cash-flowing assets.  When you own an unencumbered ounce of gold your wealth is sovereign.  Hoard it.  Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral.

Those who own gold know of what I speak.  The yellow metal seems to call out to the inner conscience and resonate with our DNA.  The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.

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