One of the most unfortunate flaws in the human psyche is the ability to believe a concept to be true only because many other people believe the same thing. Quite often enough people can come to their senses that the concept can be debunked relatively quickly and no real damage is done. On occasions, however, the masses can remain delusional for a very long time. I am going to explain the current delusional state of the masses with respect to fiat currency. The people who can shake themselves out of this delusional state can profit.

Imagine you own a house free and clear and you are in possession of the Title Deeds. The Deeds are printed on paper. What is this paper document worth? The paper is worth nothing but it certifies that you own a valuable real asset; the house. You want to buy a Mercedes so you go to your local dealer and choose a car you like. You tell the salesman that you will give him your house in exchange for the car. He agrees and you hand over the deeds to your house. The salesman doesn’t know if your house actually exists because he hasn’t seen it but he can trust the authenticity of the Deed document. Later on that day the salesman decides he wants to buy a yacht from a friend. He hands over the deeds to the house as payment for the yacht. The government realizes that this is an excellent monetary system so it is officially adopted. Trade flourishes and business people conduct business with confidence knowing their products are being exchanged for assets of intrinsic value. The government then announces that the Title Deeds no longer will be issued against a house but the government will issue “Deeds” that are identical to the real Deed documents which can be used in trade as payment but a house will not be allocated to you. The reason for doing this, the government says, is to provide “liquidity” because there are not enough houses and that is restricting those that don’t have houses from participating in the economy!

What would you think of this new money? Would you treasure it and hoard it? It is valueless BUT it is still exchangeable for real goods while the crowd remains delusional. Clearly the people who will benefit will be those that come to their senses first and exchange these worthless pieces of paper for something of value before the public collectively comes to its senses and no one will accept them.

You are probably laughing at what a stupid system this would be. Well don’t laugh too loud because this is the story of the US dollar and all other fiat currencies. The dollar started out under a gold standard as a deposit slip for gold in the bank. When the Federal Reserve was created in 1913 $20.67 dollars bills were the “Title Deeds” to one ounce of gold. With these title deeds you could reclaim your gold from the bank or you could pay for goods and services because tradesmen trusted the dollar bills as being authentic certification that you owned a certain amount of gold. In 1971 Nixon “closed the gold window” and declared that dollars were no longer redeemable for gold!!! So the dollar became the “Title Deeds” to nothing. What is strange is that the delusional public didn’t wake up to what had happened. They have continued to trade these defaulted instruments in exchange for good and services!

In the panic that has consumed the public in 2008 major companies have gone bankrupt, others have been bailed out by the government, stock markets have fallen, and so too have commodities. Governments around the world have stepped up to save us by “increasing liquidity”. That is to say they generated more “title deeds to nothing” to help us out of the crisis.  There are even analysts (deflationists) who are proclaiming that in this crisis we should accumulate these defaulted instruments because “Cash is King”! Cash used to be King when these notes were the titles deeds to something of intrinsic value such as gold.

Let’s take a look at the sorry history of the dollar.

FIGURE 1

In a pure gold standard the amount of paper currency should exactly match the gold held by the banks. Figure 1 shows the gold price from 1913 to 1980 as the blue line. The US government couldn’t resist the temptation to deficit spend. That is to say to create more dollar bills than could be redeemed for gold. The red line shows the Federal debt divided by the number of ounces held by the Treasury. This represents the amount by which the official gold price should have been revalued to have 100% gold backing of all issued dollar bills.

In Figure 2 the ratio of the Federal Debt per gold ounce to the actual gold price is shown. Although the Treasury no longer redeems dollars for gold this can still be done on the futures exchanges or with bullion/coin dealers. The chart shows by what multiplying factor the market price for gold would need to be adjusted for the Federal Debt to be 100% gold backed. When Nixon closed the gold window the official gold price needed to be multiplied by 30 for 100% gold backing (point “1” on the chart). By 1980 the gold price peaked at $850/oz which was still only 20% of the price required for the Federal Debt to be 100% gold backed.

FIGURE 2

The ratio peaked again in 2001 as our current bull market commenced (point “2” on the chart). At that time the gold price was a factor of 80 undervalued for 100% gold backing of the Federal Debt. If the bull market ends at the same x5 level that it did in 1980 and the current debt level remains static (highly unlikely!) then the gold price will peak at $8,000/oz. For 100% gold backing of the Federal Debt gold would need to be priced at $40,000/oz. However, this also assumes that the US still has gold reserves of 8,300 tonnes. Traders have recently observed “coin melt” gold bars coming to market which is likely to have come from US official reserves and would also indicate that no good delivery bars are readily available. This along with other evidence GATA has amassed suggests the US may have significantly less gold than the officially claimed amount, but more importantly, they may be close to depletion.

It should be noted that the Federal debt is not equal to the money supply, but it is a good proxy for this discussion and the actual amount of dollars issued is higher.

It should not be forgotten that the US dollar was a deposit slip for gold which has been defaulted upon. However, the futures exchanges and bullion dealers will still exchange dollars for gold and they will give you 80X more gold than US government would give if they were to reinstate convertibility! Do you still think cash is King?!

In my initial example would you rather own bogus “Title Deeds” to houses that don’t exist or would you rather own a house? With respect to the dollar would you rather own defaulted deposit slips for gold or the gold?

Central banks have defaulted on the redeemability of currency; however, they still keep gold. Why? Because one day the public and foreigners will awaken from their delusional state and no longer accept “title deeds” to nothing as payment. One day payment with real assets will be required and gold is the only real asset the Government has.

You can profit by shaking yourself out of the delusion that amassing dollars is better than amassing gold or silver. Many people have already come to their senses and have cleaned out almost every retail supply outlet in the entire world. Now that has all gone they will move to clean out the COMEX where the Gold Cartel manipulates the price to maintain the delusional state that dollars are the safe haven.

When defaulted instruments are being circulated as money you never know when suddenly the madness of the crowd will evaporate and suddenly the bills are viewed for what they really are…worthless. This has already happened to Iceland. One day foreigners accepted their Krona as payment the next day they didn’t. This will happen to the dollar. It is not that its value will change it is that everyone will suddenly recognize its true value. When that happens the “Cash is King” proponents and all the deflationists will have a tough time changing their paper for gold or silver.

In 1971 the government’s gold window was closed. In 2008 we will see the closing of the “private sector gold window” where lack of silver and gold supply will make it impossible to exchange fiat currency for precious metals, as is already happening now. Make sure you you get some in time. The repricing of gold and silver will be phenomenal. When metals become scarce the mining stocks will become the recipients of investments flows as the next best thing to owning metals on surface will be owning metals in the ground.

Adrian Douglas

www.marketforceanalysis.com

freeofstate.org/new/