Saturday, August 20, 2011

Isaac Newton never could have predicted Cash For Gold

Newton the conjurer

Sir Isaac Newton is rightly regarded as one of the most brilliant minds in human history.  Newton, associated with describing the Three Laws of  Motion that underpin modern physics (inertia, motion, and action/reaction), also described the law of universal gravitation.  He was also one of the initial discoverers of what we would come to know as calculus when he was around 21-22 years of age. 

But these major advancements in thought were not what Newton himself considered his prime lifetime achievements.  In fact later in life he considered his discoveries in calculus to be a product of youthful curiosity, but not his magnum opus.

You see, later in life he was Master of the Royal Mint, responsible for setting the standards of coinage and chasing down counterfeiters and debasers of the money supply.  His knighthood was bestowed by Queen Anne in 1705 because of his devotion to the goals of the Royal Mint, from whence he became known as Sir Isaac Newton. 

As Master of the Mint Newton also believed he could deduce the process by which base metals could be transformed into gold.  He considered his works in alchemy to be superior science and encoded them in riddle to keep their secrets intact.  This was only responsible... after all, if you had deduced the secret to transforming base elements into valuable gold, you wouldn't want to exactly publish the findings.  He felt his research into alchemy would be where his fame would be more likely enshrined, not the Principia

The ruling classes were in perpetual pursuit for a means to expand their gold supply so as to fund their trivial pursuits of war, conquest, glory, and riches.  Notwithstanding the inflationary effects of gold supply per se, the mystical promise of alchemy held sway over centuries across many European dynasties, western and eastern, northern and southern. Anyone who possessed intellect and intellectual gravitas on the subject was amply rewarded with resources and title.

Today we look upon the elemental transformation of base metals into gold as folly, a fairy tale, failed magic.  While the specifics of alchemy in this sense have been thoroughly discredited by modern chemistry, the desire to convince the masses that worthless assets are in fact worth much more has not ceased.

In more recent decades alchemy has come full circle, in an extraordinary way.  We are witnessing one of those few times in human history when the masses have become convinced fiat currency is gold while the bullion itself is ephemeral.  People consider paper dollars the superior asset, and gold the one to be tossed away. 

Pied Piper for the Rich
The Cash-for-Gold industry has taken the popular imagination by storm.  In this business people are offered money for their gold and silver jewelry, either through the mail, on the spot at impromptu fairs set up in hotel conference rooms, or 'Gold Parties' at people's homes where they invite their friends to come for drinks, snacks, to socialize, and then sell their gold.  Brilliant.

This is wildly pounced upon by hundreds of thousands of people who are eager to cash in.

With few exceptions I find this shocking.  Bullion assets are the supreme protection for the common people against ravages of decimating hyperinflation, where cash money depreciates and becomes worthless for acquiring the basic necessities of life.

Gold and silver metals are extremely rare.  They are hard to find in the earth's crust, difficult to mine, and expensive to refine into coinage, bar, and jewelry forms.  They are a wealth reserve of considerable intrinsic value that is being extracted from the population by the moneyed interests for bits of paper that have no intrinsic value. 

Alchemy reversed.  People desire digital dollars that depreciate from inflation more than bullion assets that cannot degrade.  Incredible.

This industry, who claims to be helping people in a time a need, is being dishonest.  These shadowy companies extract from the common man his last bit of real wealth from his pocket and replaces it with rapidly depreciating paper.

Sir Isaac Newton tried to transform worthless assets into gold bullion.  Cash for gold involves helping people surrender their gold bullion for worthless assets.  My god in heaven.


A Dictator King's Dream:  convincing the world to measure gold in dollars, not dollars in gold
Seigniorage is a term that refers to the centuries old game that ruling classes would play with the money supply.  Here, the trick was to convince the people that the money they used was worth a higher value than its intrinsic metal content, and therefore usable for everyday transactions.

If you could get the people to believe that a gold coin with a value stamp of 10 units of money that had just 1 unit of gold was worth the same in practice as another gold coin that had a full 10 units of gold.. you were a very happy monarch.  You could effectively mint 10x as much money for the same amount of gold and fund lavish palaces, build your patronage, acquire more land, and conquer new nations.

Cash-for-Gold is the ultimate king's dream.  Cash-for-Gold means people are willing to exchange a fully-valued gold coin for paper that has zero gold content whatsoever.  No ruling monarch in history was ever able to pull off such a feat without severe disruptions in food supply (bread riots), civil breakdown, and rapid collapse.

But this is what is happening in the United States right now.  On the average we value dollars more than gold.  We measure gold in dollars.  We do not measure dollars in gold or silver ounces.

In 500 years the dollar may be a footnote in the annals of world history, a transient currency of a past nation-state.  But the future will still have gold and silver bullion in some form.

Just who's buying all the gold and silver anyway?

Critical thinking is not what most Americans are known for possessing in great quantity.  NASCAR, UFC, booze cruises, yes, these are emblems of our mythical 'heartland' America.  But not questioning what we're told on TV.

I don't know but... just who is paying real cash for all the gold and silver that comes across the table?  People seem stoked when they come out of these transactions with a fistful of dollars, thinking they've just scored a great deal.  They never seem to think who is on the other side of the table... if bullion is really at an all time high (as the ads claim) and poised to fall, why the FUCK would they be buying at all?  Wouldn't it make sense to NOT buy and actually be SELLING it back to people at the peak?

Here is my answer.  The interests that are behind the people paying cash see the end game coming, and it will not be pretty for those holding only cash and cash equivalents.

The Federal Reserve no longer has to print money because they have computers that can do it faster, and more is coming.  The more digital dollars that zing through the system means the dollar price of real tangible stuff that can't be e-multiplied will rise.  Bullion will be exchangeable for more real stuff later than it will today, so the smart money sees all this as a chance to buy low.

We can't mine enough gold now to meet industrial, central bank and investment demand for physical, so the deficit must come from what's called 'recycling' (e.g. cash for gold).


What would you rather have, $350 or $18,250?

Assume in 1971 you (or your parents) were sitting on a cash pile of $350. Gold was $35 per ounce.  $350 was a nice chunk of change in 1971 and could buy about as much as $2,037 would today.

You have a choice of stuffing that cash in the wall for later, or trading it for gold and stashing the gold instead.

Flash forward to 2011.  Your $350 cash pile would buy a lot less in 2011 dollars than in 1970 dollars... losing about 83% of it's purchasing power over 40 years. 

Your 10 ounces of gold today would be tradable for more dollars.  A lot more.  At $1,825 per ounce your 10 ounces would be worth $18,250 in dollar terms.

Today, what do you think will hold its value better for the next 30 years?  $1,825 cash stuffed in your wall, or one gold ounce (or 45 ounces of silver bullion) kept equally secure?


You cannot be invited to leave the herd
I would invite you to leave the herd but that would be herd thinking.  Do it yourself.  Thinking outside the box does not mean you become some hermit in the wilderness.  It just means you practice thinking about things critically, and develop immunity to talking-head syndrome.

Game?

Here's a practice pitch:  when it comes to bullion, stop thinking of it in 'dollars per oz'.  Instead think how much paper is required to trade for one ounce of bullion.  As in, "today my one ounce of gold can be traded for $1,825 pieces of paper with Washington's portrait on them."

I rather suspect.. that's how Sir Isaac Newton would have thought of it.  

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