The recent rise in Bitcoin prices, amidst a backdrop of money printing gone mad, should be a wake-up call to billions that mistrust of global Central bankers is going mainstream. Sadly, it won’t be; as the vast majority has neither the means to protect themselves, or the will to explore the possibilities of a more complex future. Clearly, if 12 years of PM outperformance and surging inflation didn’t spur the masses to action – notwithstanding this year’s epic raids; than certainly, new-fangled virtual currencies won’t do so either. Irrespective, it’s undeniable that the fiat currency system is rapidly destroying itself; whilst both physical Precious Metals demand and the un-manipulated Bitcoin price are at record levels. And thus, it’s time to ask some hard questions about what comes next; given the certainty that the ill-fated fiat currency regime will spectacularly fail – just as the previous 599 attempts, throughout 1,000 years of history.
Given my 24 years of financial market experience – including 15 of public writing – I have been as diligent a student of global economics as possible. Not only have I watched the markets tick for tick, but done extensive research in not only my specific areas of focus – i.e., energy production, mining, and precious metals – but countless others as well. I have also read volumes of history to gain context for current trends, and spent the past decade identifying the rapidly contracting list of “good, smart people” with both superior intellect and benign intentions. I’m not a rocket scientist; but then again, I’m certainly no dummy; and I’ll match my macroeconomic track record with the best of them. Thus, nothing makes me crazier than assumptions I don’t “get it” because PM prices are down this year; or better yet, I haven’t accepted virtual currencies without reservation.
Certainly, technology is advancing in leaps and bounds; as are government attempts to suppress those that oppose them. And even more certainly, I am not a technology expert. Better put, I keep up with modern technology solely to survive; as is the case with perhaps 99% of society. However, when it comes to the topic of money, it’s difficult to argue I “don’t’ know what I’m talking about.” And the same goes for David Schectman and Bill Holter; as cumulatively, we have been in the “money business” for seven decades.
As global money printing explodes – whilst PAPER PMs decline and Bitcoin rises – are we “missing” something? Has the cumulative knowledge of thousands of years of human experience suddenly evaporated? Is it possible that the age-old reason for owning Precious Metals – i.e., wealth preservation from currency debasement – has become obsolete? And if so, can their place be taken by “virtual” currencies – in many aspects, also created out of thin air?
Last night, I had dinner with my good friend Mike Krieger of libertyblitzkrieg.com – in my view, an expert in the field of virtual currencies; as well as Megan Duffield of the Silver Circle Movie. I could not have been happier, as not only are the three of us both intelligent and devoted to our fields, but represent the “youth movement” necessary to usher in better times. Not that we have the power to individually do so, but few of my peers are younger than me; so hearing such forward-looking, impactful analysis from Mike, age 35, and Megan, 27, inspire me to continue educating myself – and others – for as long as it takes.
As you can imagine, much of the conversation related to Precious Metals and virtual currencies, particularly Bitcoin. Clearly, virtual currency technology is a force to be reckoned with; although at this point, it is impossible to discern if Bitcoin will be a “winner” – as “Excite” and “Ask Jeeves” once were in the search engine space; or if time and tide will allow a new “Google” to emerge. Or, for that matter, if virtual currencies will in fact have a prominent role in the future.
Interestingly, both Mike and I immediately brought up yesterday’s article by Martin Armstrong, who claimed Bitcoin would eventually die; likely due to government pressure, in light of this week’s hostile Senate hearings. Moreover, Armstrong stated:
The precious metals are NOT going to be a hedge against the dollar, hyperinflation, or any of the other nonsense the gold promoters have spun to sell whatever they can like snake oil salesmen. The role of the metals will be as an alternative currency to ELECTRONIC when they terminate “printing” paper money.
–Armstrong Economics, November 20, 2013
As you can imagine, I took great exception to this statement – given its historical inaccuracy. However, it’s hard to argue with his notion that society is being taken “cashless” by a government intent on controlling our lives, and commandeering the means of payment. One can simply look to the recent FATCA and FBAR regulations as proof positive of such intentions; let alone the anti-alternative currency actions taken by other governments, such as India.
While admitting Bitcoin itself may not survive – given the unpredictable, potentially volatile events surrounding a global monetary change, Mike pointed out that Bitcoin’s technology is what ultimately matters, as opposed to the company itself. This is why he tells people to invest no more than 1% of their funds in it. And I do emphasize invest, as at this point, Bitcoin remains highly speculative – as opposed to physical gold and silver, which Cartel or not, tapering or not, Bitcoin or not, aren’t going anywhere.
Bitcoin technology has by no means been perfected, but clearly represents a growing movement away from government-regulated payment systems. Generally speaking, a rapidly growing group of people don’t want insolvent, thieving banks executing, monitoring, and taxing their transactions; and certainly don’t want currencies mass produced by governments that ultimately debase them into extinction. Ignoring this movement could be financial suicide; but at the same time, believing it will replace gold and silver could be equally dangerous.
Cashless society or not, “cash” and “money” are two different things entirely. That is, while governments can mandate the means of payment, they will always fail in their attempts to create it. That is, due to the definition of money, no “fiat” monetary decree can last – as history vehemently tells us. In order for something to serve as money, it must be fungible, scarce, and verifiable – while serving as both a medium of exchange and store of value. Knowing this, it shouldn’t surprise anyone that only gold and silver have successfully occupied this role throughout history – as demonstrated in this short video. All 599 previous attempts to replace them as money have failed; and given the current exponential growth in global debt, it is becoming increasingly clear that number 600 is right around the corner – or more accurately, numbers 600 through 781, given 182 fiat currencies currently circulate.
To a great extent, Western society is already cashless. In America alone, just 27% of all point-of-sale purchases were made with cash last year, a percentage that is rapidly declining. True, a substantial cash economy exists “off the books”; but generally speaking, at least 60% of all business is transacted with credit. Five years from now – assuming the current system lasts that long – this figure could be closer to 70%; and ten years from now, who knows? However, if Armstrong is correct – which for once, I agree with – cash transactions will ultimately be banned. Just as the NSA spies on all emails and phone calls, the IRS will want to be privy to all financial transactions. Remember, it was just a year ago when the government attempted to sneak “fine print” into the Obamacare bill mandating the reporting of all transactions above $600. Ultimately, such draconian measures was before its time; but trust me, it’s coming. Similarly, the House actively debated the confiscation of IRAs amidst the 2008 financial crisis; which I assure you, is a debate not yet ended. In time, even if simply for practical purposes, cash will disappear. And in its stead, what? A “gold standard?” Virtual currencies? Or a combination of both?
What Armstrong fails to address is the fact gold and silver have always been money; not to mention, that Bitcoin, while “convenient,” would take decades, if not centuries, to establish a track record. When one reads of this year’s record physical gold demand – principally, from the soon-to-be undisputed Superpower China – it’s frankly, ludicrous to state otherwise. Not to mention, insinuating silver prices have fallen to multi-year lows – entirely during U.S. trading hours – due to anything other than manipulation, when considering this year’s record U.S. Mint Silver Eagle sales. Yes, the mint sold more silver Eagles in the first nine months of 2013 than all of 2011, when prices hit $50/oz. and a so-called “bubble” was forming. And yet, we’re told silver is in a “bear market” – as worldwide money printing accelerates at its highest-ever level.
Last night, Mike thoughtfully expressed that the only way gold and silver would actually be used as money would be the “Mad Max” scenario of global social unrest. I agree entirely, but I don’t own Precious Metals for that reason; aside from a bit of junk silver, of course. Both of us agree that ultimately, the world’s next monetary system must be based on something of value, and even a “gold standard” per se may not work – given trust in government gold holdings would still be necessary. I mean, if we haven’t been afforded a Fort Knox audit since the 1950s, why would we trust the next government to be truthful – particularly when they have countless “off balance sheet” methods to lease, swap, and otherwise encumber such assets?
More likely, the new system would be based on gold, but managed with “off the grid” technology like Bitcoin. In other words, a so-called third party arbitrator of value. I wouldn’t dream of trying to figure how it would work, as such dynamics involve countless unknown variables of varying technological complexity – not to mention, political agendas. And honestly, I don’t expect such a Star Trek-like advancement until long after the current system implodes; after which, I anticipate many difficult years. However, irrespective of the what, when, and how, the one thing I am sure of is gold and silver will maintain their purchasing power over time.
No matter how things evolve, 5,000 years of monetary history won’t suddenly be erased by a new form of fiat currency; which, by the way, is exactly what Bitcoin is. To believe Bitcoin’s masters will never allow supply expansion is pure folly; in my view, no different than what was agreed in 1944’s Bretton Woods Conference. Moreover, bigger, smarter computers will surely enable increased rates of production, at cheaper costs; yielding a rapid technological evolution involving more complex virtual currency algorithms and faster computers. But in the end, it’s still fiat currency – until proven otherwise.
Frankly, I could care less if gold and silver again become the money of the realm; stores of value like $259 million Cezanne paintings; or, as Armstrong predicts, “alternatives” to new, “cashless” currencies. However, what I do know is I will never sell my coins – barring emergency or barter, of course – until a currency exists I deem worthy of selling them for. Could that one day be Bitcoin? Perhaps, or another form of virtual currency. As for today, Occam’s Razor tells me PM prices have been purposefully suppressed to levels well below their current worth; while simple math tells me the fiat Ponzi scheme must expand until it eventually implodes under its own weight.
To conclude, the past two years have been very trying for those in our camp – as it’s extremely frustrating being macro-economically correct but punished miserably for it. Like it or not, we have been born into an inflection point in financial history; and thus, while volatility will surely become a way of life, the END GAME of gold and silver revaluation – to many multiples of their current purchasing power – is set in stone.
“Mike pointed out that Bitcoin’s technology is what ultimately matters, as opposed to the company itself”
” I’m not a rocket scientist; but then again, I’m certainly no dummy; ”
You’re no dummy? So why are you referring to bitcoin as a company?
That’s all you got out of the article (which, by the way, I wrote at 3 am)?
Obviously, I’m referring to the product – not a specific company; and you can buy “stock” in it on Mt Gox.
“Mike pointed out that Bitcoin’s technology is what ultimately matters, as opposed to the company itself”
“Obviously, I’m referring to the product – not a specific company; and you can buy “stock” in it on Mt Gox.”
Obvious to whom? I think most readers would think bitcoin IS is a company based on what you wrote. And your clarification doesn’t help. “You can buy STOCK in it? ” Well then, maybe I’ll ask my local coin dealer if I can buy some stock in a 1oz. Gold eagle next time I see him. Makes about as much sense.
“form of fiat currency; which, by the way, is exactly what Bitcoin is”
This seems to be a favorite meme of the “only gold (and silver) is money” crowd, but it seems like quite a stretch to me. Most definitions refer to fiat as having the power and force of GOV behind it. Misses.org defines fiat as:
“Often called paper money, fiat money is in a wider sense any money declared to be legal tender by government fiat (ie law)”
Governments fiat money will be forced upon the population with threats of imprisonment for not paying taxes, or execution if you are a world leader and want to accept anything other than dollars as payment for oil.
Bitcoin is not created by GOV. Its value is determined by the market. It is not forced on anyone.
How is that Fiat?
As Bill Holter often points out, it’s all about logic and reason.
The fact is that the dollar (the current fiat experiment) has already failed. Since we went off the gold standard the dollar has lost 95% of its purchasing power. Now they say 2% inflation a year is acceptable, but: Hello! That’s 10% in 5 years, certainly only a fool would put their money in a saving account even at this [bogus] inflation rate. They’ve rigged the game so you want to spend dollars, not save them. Wait a minute, that’s not right either” it’s rigged so you want to borrow dollars. Given the usury interest rates banks are allowed to charge us to borrow the, “money” OUR government prints and gives to them, it only makes sense that the Politicians, whose elections these same banks finance, rig the game in the bank’s favor.
“Whom does the money belong to? Who does its ownership belong to? To the State. Fine…then to us, we are the State. You know that the State doesn’t exist, it is only a legal entity. WE are the state, then the money is ours…fine. Then let me know one thing. If the money belongs to us…Why…do they lend it to us??”
– Beppe Grillo in 1998
Gold goes up, gold goes down [against the dollar], but if one looks at a chart of the long term trend, left to right, it only goes up, and that will continue. Right now the dollar is being propped up by free, “money” created out of thin air. Stocks are going up-up-up (just as real estate values were in 2007, also due to artificially low interest rates). Only a fool would put their cash in precious metals. I’ll play the fool. I have a friend who lost his shirt in the stock market in 2008, “never again!” he said. Now he’s right back where he was and confident it can only go up from here, “as the recovery takes hold.” But the fact is nothing has changed since 2008, and dollars are still being created out of thin air by a Government that can’t pay its bills without printing and borrowing. This one simple fact regarding our own government’s finances are all one needs to know… but everyone closes their eyes and refuses to see, “the elephant in the room.”
The world’s gone mad.
Amen!
Good article Andy. As an owner of physical in both metals, I have become fascinated in Bitcoin and to a lesser extent, Litecoin. I call them the revolutionary currencies of the new generation. This is their revolt against the establishment. I am waiting for verification of an account to trade. I believe Bitcoin has miles to go, but I am waiting for a pullback before I buy a few coins. It is high risk, in my opinion but the upside could be tempting. When you hear Max Keiser and Jeff Berwick talk of stratosphere like values, it makes sense given the finite amounts of coins. Then you hear Peter Schiff and you go, hmmmmm. Exciting times. But like you I will never leverage or sell my physical. W.
Well put, Wayne. As for me, I am done speculating on anything, so I’ll stay put. If Bitcoin goes to the stratosphere, it will be b/c faith in fiat currencies is collapsing – which will do the same thing for gold. And by the way, given the amount of demand relative to supply (especially in silver), gold and silver are pretty close to being “finite” entities as well. Not to mention, who’s to say the Bitcoin masters won’t one day increase the amount of “finite” coins?
There is no stopping the evolution to a cashless society. It will be a convergence of the internet, credit and debit cards that have Visa PayWave & MasterCard PayPass, American Express cards that have ExpressPay, and a smart phone that can be used in much the same way as a physical wallet is used, only with virtual examples of credit or debit cards with PayWave, PayPass, or ExpressPay. These developments will eventually consign cash to history. Our smart phones will contain every debit and credit card we own, as well as our entire discount vouchers and purchase receipts in digital form. As a result, there will not be any need to carry any more bits of paper in our wallets, or notes and coins. Google will produce a Google wallet, Visa will have an e-wallet, MasterCard, Square, and PayPass will all offer a similar product, as well. These products are called virtual wallets.
I don’t think that plastic cards will be eliminated in future. When a power blackout or some other inevitable technical issue occurs, plastic cards can be imprinted mechanically with paper, or some other technology will be developed to record the transaction perfectly. Placing barcodes on all plastic cards that are read by a barcode reader that is powered by some other means that back-up a power failure could possibly perform this service.
I am absolutely confident that we are on the verge of a tipping point regarding the eventual elimination of cash from our economy. As long as there is a national regime of privacy legislation, the security and integrity of the internet is assured, powerful institutions such as state and federal governments will seek and obtain taxes in full in future. This will help to fund our treasury and help to pay for community infrastructure, the operation of federal and state departments, all government projects, and policy developments. In addition, governments will not have to bear the cost of printing, manufacturing, storing, and transporting cash.
What I think will happen is that we will have a de facto cashless society first, where a majority of transactions will be done without cash, both in numbers of transactions and in the quantity of money involved. We will probably have a de facto cashless society in about 5 to 10 years’ time. After a period of a further 30 to 50 years, or somewhere thereabouts, cash will be eliminated from our economy after the nation has had a plethora of free and wide-ranging debates about this issue. However, I am not hung-up on predicting when this will happen because it may happen in 100 or more years from today.
It will be convenient not to have to ask for and carry any more paper receipts or physical discount vouchers, because they will be emailed to our mobile phones and personal computers. How incredible, powerful, and efficient will both Visa’s, Google’s, Square’s and PayPass’s virtual wallets be, once they become commonplace? Can the banking system adapt and catch-up? That is a rhetorical question. A cashless society is in every bank’s financial interest to develop. As a result, the banking sector will be totally transformed from its current configurations, to one that is mostly or wholly based on mobile banking.
Police and intelligence agencies will advocate a cashless society in order to limit or prevent crimes associated with cash. Cash, including virtual currencies such as bitcoin, always provides criminal anonymity as in the drug trade, terrorism, burglaries, organised crime, illegal gun running, and cash thefts. The crime of counterfeiting money will be completely eliminated. The black economy is based on the criminal anonymity that cash allows. This will dissipate when physical cash is removed from society. An important part of the elimination of criminal anonymity in the future will be making emerging digital or virtual currencies illegal, or manifestly transparent.
A cashless society is one where greenhouse gasses are kept to a minimum. A society with cash is embedded to a polluting infrastructure. The manufacture of cash requires the transportation and use of raw materials in manufacturing processes, with the final product transported to financial institutions. Apart from the obvious risk to society from criminals, the transport of cash in security vans leads to greater air pollution in our communities. This is not counting people who desire to make either a deposit or withdrawal to their accounts throughout the nation on a daily basis.
A cashless society does not have to be the policy of any political party or government instrumentality. It does not have to be something that is forced on any nation that is not broadly accepting and ready for it. It should only be achieved after a plethora of wide-ranging national debate. It will broadly come of its own accord through technological evolution, greater safety and convenience for all consumers. The public will increasingly demand its security, integrity and its many advantages such as reduced queuing time for payments using payWave, PayPass, or ExpressPay, with a plastic card or a smart phone.
Not only will a cashless society make paying at any retail point a quicker process, it will also make payment cues either shorter in length or non-existent. RFID, which stands for ‘Radio Frequency Identification’, will eliminate cues altogether. RFID will be adopted by supermarket chains in future. All that a customer has to do is register for an account, load up their trolley with what they want to purchase, and simply walk out to their car without going through any checkout process involving a cue of people in front of you, with staff ready to process your purchases. RFID will accurately note what has been taken out of store by a specific customer, tally each item, charge the goods to the customer, and email a receipt to the customer’s mobile phone or computer. Brilliant!
Banks and most businesses will want a cashless society because it will substantially lower their costs, by not having to deal with cash on a daily basis. This will engender all banks and businesses to operate more safely and enjoy lower cost overheads as well. Mobile banking will have a profound impact on traditional banking with suburban branches scattered amongst towns and cities. In a cashless society, there will not be any need to count, securely store, or safely transport cash. Neither will business people have to concern themselves with presenting the exact change for any customer’s cash transaction. Disputes over a customer’s change will no longer be a common occurrence.
A mobile cashless society will be revolutionary, safer than cash, convenient, quicker to operate and unstoppable. In combination, all of these factors will prove irresistible for most, if not all modern economies. They will prove fatal for the continued existence of cash, the more we move towards the future. A cashless society will provide a plethora of social and economic advantages, relative to a society that maintains cash in their economy.
Hi Andy,
I always enjoy reading your informative posts. However, when it comes to bitcoin, I’d like to give some feedback. Although you’re quite the expert on many financial topics, I think your view on bitcoin is not complete yet. Here are my 2 cents, hope you find it usefull:
> Bitcoin itself may not survive
True! Even a lead developer, Andersen, calls it an experimental currency. So as a long term store of value of your life savings it is not recommended. However, the decentralized cryptocurrency concept is here to stay; the genie is out of the bottle. It remains to be seen however if another cryptocurrency will eventually become dominant and if cryptocurrencies become mainstream or become suppressed to the underground. Indeed it is impossible to discern if bitcoin will be the eventual winner, as you say. Still, it is possible to diversify in competing cryptocurrencies one want to bet (because it is an educated bet) on the emergence of cryptocurreny.
> Ignoring this movement could be financial suicide;
> but at the same time, believing it will replace
> gold and silver could be equally dangerous.
IMO, it is not about bitcoin/cryptocurrency or PM. Both have their own merits and the one is not going to be a equivalent/substitute for the other. PM’s are the long term store of value for wealth par excellence, which you have written about many times. Indeed it isn’t going anywhere. The store of value property (over long periods of time) is unbeatable.
Cryptocurrency on the other hand is an excellent medium of exchange in a digital world (but very dependent on said digital world), a lot more practical than gold. A cryptocurrency will derive it’s value from the demand for doing transactions. Since bitcoin is from a technology perspective superior for doing transactions in a digital world, it could very well become adopted (if not suppressed by TPTB) for just that. This can be compared with the petrodollar deriving value from oil demand, but the difference ofcourse is that nobody is forcing anybody to use bitcoin, and that bitcoin cannot be abused (limited supply); it will “earn” it’s value because of voluntary demand based on its merits.
In a way, the current bitcoin valuation could be regarded as an expectation of future transaction demand. However, anyone considering buying speculatively should realize that it does not reflect current transaction demand at these price levels at all, but future demand. We still have to see that demand materialize! Probably, many current buyers did not purchase bitcoin because of an analysis, but because they were attracted by the bitcoin hockey stick graph. It is possible that future demand will indeed justify (in the futere) current valuations, or even higher valuations. Again, only time will tell. If bitcoin gets banned to the underground, a lot less transactions are going to be made in bitcoin and that will affect it’s value.
In short, it is not about bitcoin v.s. PM. They are complementary.
> And if so, can their place be taken by “virtual” currencies –
> in many aspects, also created out of thin air?
This does not do justice to the way bitcoin works. Creating/mining bitcoins has a lot more similarities to mining PM’s than to ctr-p print paper. By design, it becomes increasingly hard to mine bitcoin as there are more mining participants (attracted by the increasing value). A humongous amount of computing power is already dedicated to mining bitcoin. This computing power protects the integrity of the bitcoin network; the incentive to protect the network and process transactions is very cleverly built-in. This does not compare in any way to the ctr-p that central banks are doing.
> To believe Bitcoin’s masters will never allow
> supply expansion is pure folly
There is no such thing as the masters of bitcoin. That is one of the main points of bitcoin; it is distributed over all network participants and thus non-centralized. There cannot be a master in such an architecture. The ‘master’ is absent by design. The only way that the protocol can be altered, is if a majority of the participants (measured in computing power) agree to do so. Supply expansion can only happen if there would be a majority that wants that, not because some centralized master wants it. There is no master. A big difference with fiat currencies.
Thanks for the commentary, much appreciated.
One point of note, however, is I never said it’s PMs vs. Bitcoin. Simply that those calling virtual currencies “Gold 2.0” are suggesting it. Bitcoin has no intrinsic value, and never will. And mining “difficulties” or not, it is guaranteed with 100% certainty that all 21 million Bitcoins will be mined – at far less cost than gold, of which historically, just 1 in 10,000 explorations has ever born fruit.
Also, I said Bitcoin technology was the key here – in complete agreement with you. The means of a currency out of the system is very important; as is gold, whether as part of an official “gold standard” or simply a medium of exchange/store of value outside the system.
And as for the Bitcoin “masters”; you are right, I have much to learn. However, if someone decreed just 21 million could be mined, I’m sure someone else (the same person?) could decree another 21 million (or 21 trillion) more. No?
Sure governments will ultimately prefer a cashless society in order to more closely monitor our every financial move. However, it will only create a larger more pronounced black market currency regime. PM would fill the void nicely but too few Americans have any PM. Look at the recent episodes of the laundry detergent Tide being used as a pseudo currency. Necessity is the mother of invention and the more draconian our government becomes, the more inventive freedom loving people will get.