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GOLD
& SILVER REPORT “The rich ruleth over the poor, and the borrower is servant to the lender.” Abstract The recent surge in the price of gold has renewed the interest in it as an investment, while creating a deluge of commentary within the gold bug community. I have read many new articles that tout $3000 gold, while others speak of $400.00 gold. Neither view is wrong in my opinion – nor is either view correct in my opinion. I will explain. First and foremost it is imperative to remember that either of the above views is pricing gold in paper fiat dollar bills known as Federal Reserve Notes. These notes are paper promises to pay – not the means to pay. As such they are debt and nothing more. I have written on this extensively. All of my papers are available on my website at the end of this article. One example is Gold's Hidden Secret: The Moral Hazard of Fiat Money. Also, the following very short flash video explains the entire devolutionary process of our monetary system in full: View Flash Intro. The Standard Gold and silver coins are the hard currency system mandated by the Constitution and the Original Monetary Act of 1792. It requires a constitutional amendment to change the standard and one has never been enacted – thus the original still stands, regardless if it is adhered to or not. Any law not in pursuance of the Constitution is null and void and is as if it never existed. It has no binding authority. See the Letter to Congress for complete details. The monetary standard of the United States is a one ounce silver coin – 371.25 grains of fine silver. The bi-metallic hard currency mandated by the Constitution and the Monetary Act of 1792 call for silver and gold coins and no bills of credit (paper money). A constitutional dollar is the silver dollar – period. It can be exchanged for gold coin and vice versa, but the standard is one ounce of silver. A dollar bill is not a dollar. The first is a piece of paper fiat debt-money known as a Federal Reserve Note; the latter is a one ounce silver coin. There are no if ands or buts – this is all historical fact for anyone that cares to research it. See Silver IS Money, Part I. To price or “define” a dollar as a Federal Reserve Note is a misnomer and a complete fallacy – be it accidental or intentional. A Federal Reserve Note is a dollar bill – not a dollar. They are two entirely different entities. Knowing this, let’s take a look at the “pricing” of gold and silver in dollar bills (Federal Reserve Notes). Pricing First, we now know that this is unconstitutional and hence wrong. Any law not in pursuance of the Constitution is null and void, as if it never occurred. It has no binding authority. Just because they tell us differently does not change the facts. We are accepting the unacceptable – we are placing our faith and financial future in a lie: in promises that can never be kept or honored. Debt can not be paid with debt. It is simply offset, transferred or discharged, or defaulted on, and hence still exists – it is simply another’s debt or problem. This is why the United States has gone from being the largest creditor nation on earth, to being the largest debtor nation on earth. Even what is referred to the gold standard is a false system of Honest Money, as it was a system that merely backed paper money by gold, and the greatest percentage of backing was 40%, meaning the remaining 60% of the currency was pure fiat and not backed by gold. Quite quickly the percent dropped to 20%, and continued to be reduced to zero. The gold standard is not the same as the original hard currency system of the Constitution that mandated only gold and silver and coin and no bills of credit (paper money). Be not deceived. See Can the U.S. Return to a Gold Standard? So, what does it really mean when we “price” things in dollar bills that are merely promises or obligations to pay? The important issue here is what is called purchasing power. Money is but a medium of exchange used to buy and sell goods and services. As such, the quality (purchasing power) of money is the most crucial issue – not the quantity (supply) of money. See Honest Money: What It Is and What It Isn't - Part 7 Problems With Debt Money. The more quality (purchasing power) that money has the more goods and services a unit of the currency can buy. The less purchasing power (quality/value) that money has – the fewer goods and services can be bought with it, hence it takes a greater quantity (number of units) to buy the same amount of goods or services. Even the Federal Reserve admits that the dollar bill (Federal Reserve Note) has lost 95% of its purchasing power since the Fed took control of the monetary system in 1913. See inflation calculator at: http://minneapolisfed.org/research/data/us/calc/. What this means is that when the “price” of goods and services go up, it takes a greater quantity (number of units) of dollar bills (Federal Reserve Notes) to purchase the particular goods or services. All things being equal this simply means that the purchasing power (quality or value) of the dollar bill has gone down, causing more units (quantity) of money to be needed to buy the same amount of goods or services. Inflation This is what the inflation calculator above shows. Inflation or the price of goods and services going up is a result or effect – it is not a cause. Price inflation is the result or effect of monetary inflation (increase in the money supply compared to the increase in the supply of goods and services and or the demand for money). Besides price inflation there is also asset inflation. This is when the price (in dollar bills or Federal Reserve Notes) of assets such as stocks, real estate, and gold and silver goes up or increases, requiring a greater quantity or number of units of money to purchase the same amount of assets (because the purchasing power of the money has gone down – also called debasement or loss of value of the currency). If a one ounce gold coin is bought for $400 paper dollar bills (Federal Reserve Notes) and the price goes up to $800 dollars, and the coin is then sold or exchanged for $800 paper dollar bills, it appears that a profit of 100% has been made on the transaction. But has it? All that has happened is that the purchasing power of the dollar bill has gone down causing the number of units (quantity) of dollar bills required to exchange for the one ounce of gold to go up. How do we know this? After you sell the coin for $800 dollar bills, say you decide you want to buy another gold coin. What will it cost you to buy it – it will cost you $800 dollar bills. You now have the same gold coin back that you originally paid $400 dollar bills for. You are not any better off or wealthier – you are back to square one. This is the dirty little secret they do not want you to know or understand. When you exchange your gold coin for paper dollar bills or Federal Reserve notes – you are accepting the unacceptable – you are exchanging Honest Money for dishonest paper debt-money. Be not deceived – it is a mugs game. The house of the rising sun always wins if you play their game, as the game is rigged or fixed. If gold goes up in price to $3000 an ounce and you exchange your gold for paper fiat debt-money (Federal Reserve Notes) you will have gained nothing. The inflation and resulting cost of all goods and services will have increased dramatically – the cost of living will have gone up, while the quality of living will have gone down. Deflation Now, let’s take the example of what some refer to as deflation where gold is predicted to drop to $400 dollars per ounce. Does the inverse apply here, another words will we be better off because we can now purchase gold for less dollar bills? It depends on several different factors. Say we originally bought an ounce of gold for $400 dollar bills and then sold it for $800 dollar bills. Then the price drops back to $400 dollar bills within a fairly short time span. We can now take the $800 dollar bills and buy two ounces of gold. If the price now goes back up to $800 per ounce we can sell the two coins for $1600.00. We will now be ahead of the game if the money is used to exchange for goods and services at that time, or if when we do decide to spend it, the purchasing power has not decreased by the same percentage or amount as the number of units of money we received increased from the time we bought it until the time we sold it. It is about the balance between quantity and quality. If the weighing in the balance is found to be wanting it is what it is – wanting. The CPI is not a true measure of the loss of purchasing power – it is much greater than this figure – much greater or they would not tell you the figure they do. Just look at the cost of your kid’s college tuition or the cost of your health care and see if it agrees with the stated CPI. If true deflation takes hold it means that the price of gold will not just be going down but that a credit contraction will be taking place. The objective exchange rate of money may increase but it may be offset by other occurrences. A real contraction of credit can have some very serious consequences: assets that were priced or valued at a much higher number of dollar bills are now selling for much less if they can be sold and liquidated at any price. This is the problem we are seeing in the subprime mortgage market. An asset is of no value if it can not be liquidated or accepted and used in a needed exchange. A true credit contraction will cause many defaults on debts owed. There will be a greater number of bankruptcies. Business will slow down to a crawl. There will be a greater number of unemployed. The price or value of other assets such as real estate or stocks will drop. Whatever savings most have will have to be tapped into and spent. What wealth many have been able to scrape together will be used it. Only the elite few make out well during times of deflation, as they are collectivists that collect stuff – the stuff of others for pennies on the dollar. A recession is when your neighbor is out of work – a depression is when you are out of work. The bills still come due. You need money – income to pay them. If you are suddenly unemployed and have to liquidate your gold coins you may eat through the paper profit very quickly. This is the other side of a two edged sword, a sword that will cut on both sides – the inflation side and the deflation side. There are very few winners on either side. The one’s that usually profit are those in the middle – the middlemen – the moneychangers. Ludwig von Mises explains the two edged sword thusly: “In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur. Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense), which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long.” [Ludwig von Mises – The Theory of Money and Credit] The reason is simple – either side is the side of a false monetary system of make-believe money or wealth. Paper fiat debt-money is what it is – an illusion of wealth and a sinister mechanism of wealth transference from those that exchange their labor for the illusion, to those who create and issue the illusion and collect the interest for loaning you the illusion. Christ overturned the moneychangers table for a very good reason – the truth. “If you lend money to any of my people who are needy among you, do not be like a moneylender to him; do not charge him interest.” Even Alan Greenspan knows the truth – he did not follow it as public policy, nonetheless, he knows: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver, copper, or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.” [Alan Greenspan, Gold and Economic Freedom (1966)] There is only one solution to this two edged sword of paper fiat debt-money: a return to honest weights and measures of gold and silver coin as mandated by the Constitution – a return to Honest Money. "Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state."
 © 2007 Douglas V. Gnazzo Editorial Archive All
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INFORMATION About the author: Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME). Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America. The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
