Tag Archives: Silver

Inflation, recession, and new currencies, Alastair Macleod

The best economist on the Internet analyzes the fiat-money landscape, its inevitable collapse, and what could potentially replace it. From Alastair Macleod at goldmoney.com:

Central bankers are trying to steer markets away from higher interest rates, citing growing evidence of the harm they are doing to economic growth. Quantitative tightening is dead on arrival.

Predictably — because it is a repetitive cycle — bank credit is beginning to contract. But contracting bank credit is associated with periodic systemic crises. The credit contraction crisis promises to be even worse than the Lehman failure and any that came before it. And because central banks are sure to protect financial asset values from collapsing, their currencies are likely to suffer instead. Being entirely fiat unbacked by legal money, currencies are dependent entirely on the public faith in a financial system which lacks the backing of real money. 

We are all rapidly drifting onto the rocks which sank John Law in 1720. Central bankers, like John Law with his Mississippi bubble, are prioritising support for financial asset values over their currencies, which is what interest rate suppression is all about. Just as Law’s fiat livres rapidly became worthless, so will today’s fiat currencies.

Therefore, in the interests of one’s own self-protection, it is time to fully understand the difference between legal money, fiat currency and the importance of bank credit.

Central banks refuse public access to legal money, which is their gold reserves. Nor is access demanded by the investment establishment, which has thrived on monetary inflation. Instead, there is a developing debate about collapsing currencies being backed by commodities instead. This article puts these developments into context.

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The failure of fiat currencies and the implications for gold and silver, by Alasdair Macleod

Fiat currencies are going to their marginal cost of production—close to zero. That should increase the allure of Real Money, gold and silver. From Alasdair Macleod at goldmoney.com:

This is the background text of my Keynote Speech given yesterday to European Gold Forum yesterday, 13 April.

To explain why fiat currencies are failing I started by defining money. I then described the relationship between fiat money and its purchasing power, the role of bank credit, and the interests of central banks.

Undoubtedly, the recent sanctions over Russia will have a catastrophic effect for financialised currencies, possibly leading to the end of fifty-one years of the dollar regime. Russia and China plan to escape this fate for the rouble and yuan by tying their currencies to commodities and production instead of collapsing financial assets. The only way for those of us in the West to protect ourselves is with physical gold, which over time is tied to commodity and energy prices.

What is money?

To understand why all fiat currency systems fail, we must start by understanding what money is, and how it differs from other forms of currency and credit. These are long-standing relationships which transcend our times and have their origin in Roman law and the practice of medieval merchants who evolved a lex mercatoria, which extended money’s legal status to instruments that evolved out of money, such as bills of exchange, cheques, and other securities for money. And while as circulating media, historically currencies have been almost indistinguishable from money proper, in the last century issuers of currencies split them off from money so that they have become pure fiat.

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Here’s Why This Metal Is Prone to Crisis-Driven Manias… And the Next One Is Coming Soon, by Nick Giambruno

Silver may not run up immediately, but it’s a pretty good bet that it will over the next few years. From Nick Giambruno at internationalman.com:

inflation

The media hated them.

Big Business, numerous federal agencies, and politicians of all stripes hated them too.

Tiffany’s, the famous jewelry company, vilified them in a full-page advertisement in The New York Times, calling them “unconscionable.”

The villains everyone loved to hate were the Hunt brothers. They were critics of the fiat money system and advocated hard money based on commodities.

At the time, private ownership of most gold was illegal in the US. So the Hunt brothers turned to the next best thing: silver.

From the late ‘70s to 1980, they stockpiled silver. And unlike other investors who settled their silver trades in cash, the Hunts took physical delivery. This often meant flying the silver to Switzerland for storage.

It squeezed the supply… and helped push up the silver price. It went from around $6 in the late ’70s to over $50 in 1980.

But were the Hunts really the bad guys everyone made them out to be?

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Gold and silver prospects for 2022, by Alasdair Macleod

The prospects for gold and silver next year resemble the metals themselves: bright and shiny. From Alasdair Macleod at goldmoney.com:

It has been a disappointing year for profit-seeking precious metal investors, but for those few of us looking to accumulate gold and silver as the ultimate insurance against runaway inflation it has been an unexpected bonus.

After reviewing the current year to gain a perspective for 2022, this article summarises the outlook for the dollar, the euro, and their financial systems. The key issue is the interest rate outlook, and how that will impact financial markets, which are wholly unprepared for the consequences of the massive expansions of currency and credit over the last two years.

We look briefly at geopolitical factors and conclude that Presidents Putin and Xi have assessed President Biden and his administration to be fundamentally weak. Putin is now driving a wedge between the US and the UK on one side and the pusillanimous, disorganised EU nations on the other, using energy supplies and the massing of troops on the Ukrainian border as levers to apply pressure. Either the situation escalates to an invasion of Ukraine (unlikely) or America backs off under pressure from the EU. Meanwhile, China will continue to build its presence in the South China Sea and its global influence through its silk roads. Less appreciated is that China and Russia continue to accumulate gold and are ditching the dollar.

And finally, we look at silver, which is set to become the star performer against fiat currencies, driven by a combination of poor liquidity, ESG-driven industrial demand and investor realisation that its price has much catching up to do compared with lithium, uranium, and copper. The potential for a fiat currency collapse is thrown in for nothing.

2021 — That was the year that was

This year has been disappointing for precious metals investors. Figure 1 shows how gold and silver have performed since 31 December 2020.

Having lost as much as 11.3%, gold is down 6.5%. And silver, which at one stage was down 19.3% is down 15%. Admittedly these returns followed strong gains in 2020, so 2021 could be described as a year of consolidation.

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Money, funny-money and crypto, by Alasdair Macleod

This is a great explanation of money and how money works in an economy, a shredding of Keynesian economics, a clear warning of what’s to come, and a dashing of hopes that cryptocurrencies will be the replacement for failing fiat currencies. Alasdair Macleod is one of the few economists who understands that debt is not money, that money cannot be a liability (see also “Real Money” by Robert Gore, SLL, September 9, 2015). From Macleod at goldmoney.com:

That the post-industrial era of fiat currencies is coming to an end is becoming a real possibility. Major economies are now stalling while price inflation is just beginning to take off, following the excessive currency debasement in all major jurisdictions since the Lehman crisis and accelerated even further by covid.

The dilemma now faced by central banks is whether to raise interest rates sufficiently to tackle price inflation and lend support to their currencies, or to take one last gamble on yet more stimulus in the hope that recessions can be avoided.

Politics and neo-Keynesian economics strongly favour monetary inflation and continued interest rate suppression. But following that course leads to the destruction of currencies. So, how should ordinary people protect themselves from currency risk?

To assist them, this article draws out the distinctions between money, currency, and bank credit. It examines the claims of cryptocurrencies to be replacement money or currencies, explaining why they will be denied either role. An update is given on the uncanny resemblance between current neo-Keynesian monetary inflation and support for financial asset prices, compared with John Law’s proto-Keynesian policies which destroyed the French economy and currency in 1720.

Assuming we continue to follow Law’s playbook, an understanding why money is only physical gold and silver and nothing else will be vital to surviving what appears to be a looming crisis in financial assets and currencies.

Introduction

With the recent acceleration in the growth of money supply it is readily apparent that government spending is increasingly financed through monetary inflation. Those who hoped it would be a temporary phenomenon are being shown to have been overly optimistic. The excuse that its expansion was only a one-off event limited to supporting businesses and consumers through the covid pandemic is now being extended to seeing them through continuing logistics disruptions along with other unexpected problems. We now face an economic slowdown which will reduce government revenues and, according to policy planners, may require additional monetary stimulation to preclude.

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Suffering a sea-change, by Alasdair Macleod

When interest rates really start to reflect the ongoing monetary inflation, it will blow the prices of most financial assets out of the water. From Alasdair Macleod at goldmoney.com:

here is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.

Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.

Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.

Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values — following cryptocurrencies into substantial bear markets.

Introduction

There is an old stock market adage that you should sell in May and go away. It has already proved its worth in the case of cryptocurrencies, with Bitcoin more than halving at one point, and Ethereum losing 57% between 10—19 May. A sea-change in cryptocurrencies’ market sentiment has taken place.

As for equities, it could also turn out that 10 May, which so far has marked the S&P 500 Index’s high point, will mark the beginning of their decline. But it’s too soon to tell. However, we do know that following the unprecedented dilution of the major currencies’ purchasing power since March 2020 commodity prices have increased substantially, global logistics are fouled up and consumer prices are rapidly rising everywhere, a combination of events which is bound to lead to higher interest rates. But as is usually the case in times like these, central bankers and market bulls are wishing this reality away.

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Why the future money is gold and silver, by Alasdair Macleod

Why we’ll be using gold, silver, and convertible currencies and not cryptocurrencies as the official means of exchange after fiat collapses. From Alasdair Macleod at goldmoney.com:

A reminder why they always will be sound money and why bitcoin cannot fill that role

With bitcoin’s price still rising and expected to rise even more, there has been a growing belief in cryptocurrency circles that it will replace unbacked government currencies when they eventually fail.

The assumptions behind this conclusion are naïve, exposing hardly any knowledge in what qualities are needed for sound money. This article agrees that current events are accelerating the path towards fiat destruction, and that historical precedents point to their eventual replacement with a sounder form of money. But what that money will be is decided when governments lose control over their fiat; and the public, its users, through free markets will set the monetary agenda.

Only then will the general public determine the qualities required, and in the past, it has always opted for metallic money. And because government treasury departments and their central banks coincidently possess only gold in their non-fiat reserves, its monetisation is the only option for governments to survive the collapse of their fiat currencies. That is what will eventually happen, with silver perhaps fulfilling a subsidiary monetary role to gold.

Introduction

While increasing numbers of the fiat investment community understand that the quantities of government money are being expanded without any sign of limitation, they have also concluded that bitcoin, not gold, is the pure investment play because over the next few years bitcoin will approach its final quantity.

It is almost certain that like the majority of gold and silver bulls hodlers expect to sell bitcoin for profit measured in their governments’ currencies, creating for themselves relative wealth in dollars, euros, yen — whatever their governments impose on their citizens as money. But it is an investor’s, or speculator’s approach, which is accompanied by feverish examination of charts, confirmation bias from “experts” and only a half-understood concept of what is driving the price. So sudden and wonderful has been the unbanked wealth creation in leading cryptocurrencies, that investors commonly proclaim that gold and silver are yesterday’s story and that we oldies should move with the times.

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Crazy days for money, by Alasdair Macleod

You may be buying and selling with gold- and silver-backed money sooner than you think. From Alasdair Macleod at goldmoney.com:

This article anticipates the end of the fiat currency regime and argues why its replacement can only be gold and silver, most likely in the form of fiat money turned into gold substitutes.

It explains why the current fashion for cryptocurrencies, led by bitcoin, are unsuited as future mediums of exchange, and why unsuppressed bitcoin has responded more immediately to the current situation than gold. Furthermore, the US authorities are likely to suppress the bitcoin movement because it is a threat to the dollar and monetary policy.

This article explains why growth in GDP represents growth in the quantity of money and is not representative of activity in the underlying economy. The authorities’ monetary response to the current economic situation is ill-informed, based on a misunderstanding of what GDP represents.

The common belief in the fund management community that rising interest rates are bad for gold exposes a lack of understanding about the consequences of monetary inflation on relative time preferences. Rising interest rates will be with us shortly, and they will burst the bond bubble with negative consequences for all financial assets and the currencies that have inflated them.

In short, we are sitting on a monetary powder-keg, the danger of which is barely understood by policy makers and which could explode at any time.

Introduction

We have entered a period the likes of which we have never seen before. The collapse of the dollar and dollar assets is growing increasingly certain by the day. The money-printing of the dollar designed to inflate assets will end up destroying the dollar. We know this thanks to the John Law precedent three hundred years ago. I last wrote about this two weeks ago, here. In 1720, it was just France and Law’s livre. Admittedly, the British had their South Sea bubble at about the same time, but it was the Mississippi bubble which proved that if you print money to puff up asset prices, you end up destroying the currency when the bubble bursts. The Bank of England didn’t make that mistake, but today led by the Fed that is precisely what most central banks are doing. John Law has become global.

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Could #WallStreetBets be the early innings of a financial Arab Spring? by Mark E. Jeftovic

No one knows who the shorts torturers will go after next, but it might be silver shorts. From Mark E. Jeftovic at bombthrower.com:

WSB’s “Army” plan to target “Silver suppression” next

It’s been mere hours since Charles Hugh Smith, Jesse and I finished off our AxisOfEasy Salon 36: Democratizing Stonk Market Manipulation covering the #WallStreetBets situation and things have already morphed in a direction along one of the lines that we speculated was possible: a generalized revolt against financial repression and asymmetric rulesets (a.k.a “rules are for thee, but not for me”).

This is about more than a bunch of weaponized autists (self-described as such) end-running the Wall St. establishment for fun and profit.

Charles called it a “rebellion” at one point. Once it appeared as the the establishment was trying to step into Robinhood and get the hedgies off the hook, as that line in the old classic The Usual Suspects went…

“Then, the whole thing turned political…”

I was busy most of the day yesterday, but I kept getting email alerts that my various silver positions were up 10%, trading up on excessive volume, etc. When I did check the precious metals I noted that gold was down, not by a lot, while silver was making a sizeable move. Not unheard of for this to happen, but it’s not common.

Almost didn’t notice this comment on the Hackernews thread on my WallStreetBets proves the System is Rigged article:

It proves something anyway.I’m a moderator of /r/silverbugs and we’ve been getting slammed all morning with either accounts from wallstreetbets or accounts trying to make them look bad, with dozens of brand spanking new or barely used accounts spamming to buy various silver related stocks/funds.

I’ve banned more accounts this morning than I have in 2 years.

Then a couple hours ago I saw this:

and that’s when I realized that this thing could get real. A “reverse bear raid” on the $SLV could quite possibly upset more than a few apple carts, and here are the WallStreetBets crew laying out exactly what it entails [archived], and how their self-professed  “AoR” could go about it [archived].

Can they do it? Time will tell. Silver up almost 2% on the day and silver stocks are screaming higher.

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Restoring Sound Money to America, by Jacob G. Hornberger

If you want honest money, you have to get government completely out of the money business. From Jacob G. Hornberger at fff.org:

The U.S. Constitution states:

Article 1, Section 8

1. The Congress shall have Power …

5. To coin Money, regulate the value thereof, and of foreign coin….

6. To provide for the punishment of counterfeiting … current coin of the United States.

Article 1, Section 10

  1. No state shall … emit Bills of Credit and make any Thing but gold and silver Coin a Tender in Payment of Debts.

The intent of the Framers could not have been clearer. The Constitution clearly and unequivocally brought into existence a monetary system based on gold coins and silver coins being the official money of the United States.

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