Gold Concerns

by | Sep 9, 2009 | Multi Currency Investing

Our recent Gold Update evoked this response from a reader.

Dear Gary,

Firstly, thank you for your daily commentary, which I do trust as being truthful. Your recent comments on gold importation into Ecuador were helpful, but I was somewhat disturbed by the comments regarding investment in gold.

Physical gold (and silver) have the primary advantages of no counter party risk and of always retaining value.

A secondary advantage as an investment may be appreciation in value, but over longer periods of time, the value is actually pretty stable. So making a profit on precious metals may be possible, and also very likely today, however investing in derivative forms (paper promises) of pm is very risky in today’s environment. The Gold Anti Trust Committee estimates that there is 20 times more paper promised gold than there is physical metal. Please see forwarded recent article below.

This reader has a point… but there may be bigger problems. To see them let’s think more about gold and its value as a currency.

Few economic events can have as much impact on your life as the falling U.S. dollar. You can learn this by taking a trip abroad where the dollar has fallen versus other currencies.

To understand why and how currency parities move, let’s delve more deeply into the definition and history of currencies. Let’s look at  how currencies are created, how inflation occurs, and how the value of money is determined by foreign exchange markets.

Money makes it possible for us to buy and sell without bartering. Money gives us a “medium of exchange,” which allows our complex economic system to function.

Money acts as a way to put tangible, universal value on commodities and services. It helps us compare the value of one thing with another. This gives us a “unit of value,” which allows us to make decisions about purchases and investments.

Money should also provide  a way to store wealth — to preserve purchasing power for spending at a later date.

Money must be real to carry out these functions. We learned in the recent Gold Update that only money created by real production can be real money, but there are other qualities money must also have if it is to work properly. Money must have six specific qualities:

* Specific Money Quality #1: Money must be acceptable by both parties in a transaction. To be absolutely universal in value, money must be acceptable to everyone.

* Specific Money Quality #2: Money must be portable. One must be able to take money where it is needed. This is what has made paper and plastic money so much more popular than gold. Paper currencies, checkbooks and credit cards are so much easier to carry than lumps of gold and silver (though as we will see, the price we pay is high for giving up the discipline that comes from the rarity of precious metals).

* Specific Money Quality #3: Money must be rare and require effort (real production or work) to attain. If you look at all of the qualities of money, you can easily see why gold makes such good money. This precious metal has all of the qualities required of money. Yet if you compare gravel to gold, you will see that gravel also has most of these qualities, except rarity. Gravel is as common as dirt and if gravel were used as money instead of gold, the temptation to just pick it up on the road, rather then work for it, would be too great. Money must offer an incentive to work and apply discipline. Rarity creates this incentive.

Reducing this quality of rarity creates inflation. When governments reduce the rarity of money, their action destroys money’s value.

* Specific Money Quality #4: Money must be divisible and uniform in quality. In other words, people must be able to know that each unit of the money is real, not forged or altered.

* Specific Money Quality #5: Money must have some intrinsic value, or be useful in itself or be backed by some intrinsic value.

* Specific Money Quality #6: Money must be naturally durable. There have been many times when goods or commodities such as chocolate, coffee, cigarettes or silk stockings, etc. have been used as money. The conditions were such that the commodity was so desirable and so rare that these two qualities were enough to make them a form of money. Yet they fail to last as a money because they are too fragile and once consumed cannot be used as money again. Real money must be naturally durable and able to be used again and again.

Metals such as bronze, gold and silver fit many of these categories.

Yet these metals are weak when it comes to the portability issue.  Carrying much gold is heavy. You’ll wear our a lot of pockets!

Plus there is the security issue. If everyone knows that everyone has a lump of gold sitting around the house… the temptation to rob grows.

Early goldsmiths and jewelers solved the problems of security and portability.

They took gold on account and offered scrips or tickets stating how much gold was being warehoused.  Because these jewelers were extremely serious about backing their certificates 100% with gold and keeping it really safe people realized that these scrips in themselves had value, since they represented claims on a specific amount of gold.

The certificates were as good as gold… but safer and much more portable!

As a result, the scrips began to be exchanged as money. They were certainly easier to carry than the metal itself, and since they were backed by gold, why would they not be as good as gold?

Goldsmiths soon realized that it was possible to issue more scrips than could actually be converted into gold — if not everyone came at the same time wanting to convert their money into the precious metal standing behind it. Thus were born the first bankers, who in essence created money by issuing more of it than was backed by gold. Such money is called Commodity Money.

Important point to remember: The creation of Commodity Money is an important step in the evolution of money for modern society. Commodity money, if disciplined, helps expansion.

However, long ago, governments jumped into the act and began creating Fiat Money.

According to Wikipedia: Fiat money is money declared by a government to be legal tender.  The term derives from the Latin fiat, meaning “let it be done”. Fiat money achieves value because a government accepts it in payment of taxes and says it can be used within the country as a “tender” (offering) to pay all debts. In effect, this allows it to be used to buy goods and services and to pay tax. Where fiat money is used as currency, the term fiat currency is used. The most widely-held reserve currency, the US dollar, is a fiat currency, as are other widely held currencies like the Euro, Pound Sterling and the Yen.

Governments began controlling currencies by crowding out the goldsmiths and issuing Commodity Money.  Then they began uncontrolled expansion of this commodity money to the point where the money is forced to become fiat money.

This uncontrolled expansion has been the prime ingredient in the destruction of currency after currency since this idea began.

Originally bankers were able to create paper money from their scrip because of their reputation. The bankers were the keepers of gold and the lenders of money. They were known to be prudent, honest and very disciplined. Their businesses, their reputations and the economic lives of the community were in the hands of the bankers’ judgment. Hence the reputation of the steely eyed, tough minded banker who lent money only to those who would be most likely to pay the loan back.

Once governments discovered that it was possible to create money without backing, they quickly caught onto the idea. No government in history has wanted to be left out of a scheme that creates money from thin air, so most governments in the world took over the process of issuing scrip not wholly backed by gold… or anything of value… except the integrity of the government.

Some governments still issue “commodity money”, which consists of paper money convertible to the precious metal designated. The money may be backed 100% by gold, or 50%, or 25% — or less than 1%.

“Fiat money” is coin or currency that is not convertible to any precious metal. Issued by governments, it has value only because it provides all the necessities of money as described above — and because it is declared to be money by government decree.

Pure fiat money (currency or bank deposits with no tie to precious metal or any commodity with inherent value) can be valuable only when it is scarce. If a government issues too much fiat money, the value falls and inflation results. Thus, the value of fiat money ultimately depends on the confidence people have in the government issuing the money.

Almost all currencies in the world today are fiat money not backed by silver or gold. A U.S. citizen cannot walk into a bank and exchange a dollar for gold. A dollar is valuable only because everyone believes (has confidence) that it will be accepted as legal tender by everyone else.

Important Point To Remember: As the confidence in the U.S. dollar erodes, the value of the dollar will fall. As the dollar is still the reserve currency of the world, other currencies that are backed by the dollar will lose confidence as well. Until confidence in the dollar is restored or until a new reserve system is created, there will be global currency turmoil.

So where does one turn to store wealth?

The Gold Update mentioned Perth Certificates. These are commodity money 10% backed by precious metals… at least we hope.

One reader shared this thought:   Gary, you cited the Perth Mint as a good custodian, however there are many documented complaints from Perth Mint customers citing delivery problems about one year ago. Jason Hommel’s website should have these articles available from that time period. While some of his ideas are a little “out there”, I believe that he is pretty well-informed and truthful.

I realize that you have 40 years of investment experience, which is much more than mine. However I have focused highly on precious metals in the last 4 years, and I believe that the game is rapidly changing. Please do come checking so that you do not put your readership at risk with their savings.

Hommel’s website does come down hard on Perth in an article entitled Perth Mint Fraud.

However… Hommel’s protestations don’t make a lot of sense to me and I have a note in to our friends Michael and Rich Checkan, who have been Perth Mint agents for many years.  I’ll share their reply so we can see both sides of this pictures.

What is important to note is premium factor. I do not know how much Perth charges as a premium…but one thing we can know is that gold is an expensive store of value.  It costs money to refine… move and protect gold.

The reader goes on to say: By the way, I agree with JGAM’s recommendation that a higher percentage of gold in the portfolio is riskier (if it is in the form of paper promises). However, if the holdings are physical bullion, then the opposite should be true. Almost no investment adviser will recommend investment in physical bullion, because they do not make a profit in that case. The most prudent actions are not always the most convenient ones.

The reader has a point that physical gold has many aspects of money.  However there is more to the picture of gold’s role as a store of value.

Gold has the following risks.

Gold risk #1: Timing: On May 5, 1971, I was staying at the Raffles Hotel in Singapore having breakfast in a great outdoor restaurant just next to the Long Bar. There was something comfortable in the old fashioned pots of thick cut marmalade and slightly burnt toast that stood in racks of sterling silver. This elegant setting and the quiet service was an easy, wonderful way to start the day. I felt in place, relaxed and comfortable, part of an ancient tradition, the modern link in a rite that this hotel had offered for so many generations past. I sat back feeling that all was well. I felt in control and on top of that modern era.

That suddenly changed as I was about to learn a serious lesson about international currencies. I opened the morning Straits Times and the headlines declared “U.S. Dollar Devalues”. That comfortable era had just come to an end. International currencies were in turmoil.

As an American at that time I traveled only with dollars. From centuries past, history had seemingly supported my financial well being up to that very moment. Britain’s colonial days leading to the emergence of America, the World Wars, modern technology, Yankee know-how, puritan work ethics and unbounded natural resources had all worked on my behalf to form the greatest economy recorded time had ever known.

This history had created a world economy vastly dominated by the United States of America. Forces, building before and throughout the twentieth century, lead to incredible economic power within the United States. This domination made the U.S. Dollar the bastion of global currencies and made it the reserve currency of the world.

Yet the Bretton Woods Agreement was broken and the US dollar devalued.  Money changers would not take the greenback. I couldn’t pay for my hotel. I couldn’t even pay for breakfast and I was 12,000 miles from home. Was I ever scared!

That started me looking at investing outside the US dollar.  I invested in yen, German marks and Swiss francs and gold.  My timing was perfect and through sheer good luck, I exited my gold holdings in the late 1970s (not because I was smart but because I needed liquidity to buy real estate).

What a great profit!

gold-chart Then gold collapsed and offered what appeared to be an enormous value at about half it peak price.  I purchased a couple hundred thousand dollars worth, in the $40o an once range, stored for me in a Swiss gold account… thinking that this gold would keep pace with inflation.

Instead, despite inflation, the price of that gold fell by about 50% over the next 20 years!

Had I needed that liquidity anytime during that period, I would have taken a hefty loss.  Meanwhile… every year the bank charged a hefty fee… over 2% for holding that gold.  Over 25 years (I exited the position at about $700 an ounce) that added more than half my original investment!

Taking inflation into account…though bought at $400 and sold at $700… the investment did not maintain much value.   This shows the fact that if you buy physical gold… you may have to hold for extensive periods to make a profit… or become a trader (a totally different story).

Gold Risk #2: Theft. If you have a pile of gold laying around somewhere… how do you protect it?  Do hide it or put it in a safe. Who do you tell in case you die or become incapacitated?  What are the risks of someone stealing it?  The risk grows if you travel.

Gold Risk #3: Travel. While you are on the road, your risk of theft grows. If you leave the gold at home,  who protects it?  Carrying a lump of the yellow metal  entails risk as well… especially if you cross borders.   Though it may be legal to take gold across borders… there are a variety of pitfalls ranging from duties to pay to rogue customs officers who may decide to cash in on your wealth.  Anti terrorism regulations often require that you show a legitimate source of money to have purchased the gold… a real can of worms.

What do you do if you suddenly need cash on your travels?

Gold Risk #4: Cost in time and money: There is a purchase and storage cost for gold… plus if you have taken delivery and want to sell your gold… you may need to pay a fee to prove the quality of your holding. For example one reader sent me this note about selling gold in Ecuador.

Hi Gary,  I read with interest your article about bringing gold into Ecuador.  I 
live near Quito and last year was trying to sell a gold eagle.  I could
 not for the life of me find anyone willing to pay anywhere close to spot 
value.  I don’t know of anyone who is in the business of dealing in
 minted coins/bullion in Ecuador.  If you know of any I would very much 
like to be informed.

Those small dealers who advertise on the street that they buy gold
 usually treat any gold they buy as junk gold of questionable purity,
and my experience is that minted bullion is treated the same.  Some
 places will offer loans with the bullion as collateral, but I’ve found 
the service charge and interest rates to be obscenely high considering
 it’s backed by collateral they hold.

My advice to anyone considering in bringing gold bullion into Ecuador is
 to not do it.  They will be far better off leaving such bullion in 
trusted hands in a more developed country where bullion dealers can be 
more easily found (or found at all), and liquidating them there if and
 when they see fit.  It would be much more likely that buying gold in 
Ecuador would be a much better deal.  Junk gold (jewelry) and unrefined
 gold is much more likely to be found here.  Perhaps that is where
 opportunity can be found. I appreciate your articles.

Gold Risk #5: Legislation. Governments have control over a potential great con game when they are given control of a nation’s money.   When times get bad, they are not about to let this go. History suggests that the worse a government is at managing a nation’s money… the less likely it is to allow citizens to protect themselves with gold.

There are numerous ways that a government can make it difficult or expensive to own gold.  If  such legislation is passed, what can one do?   Is it worth becoming a criminal to own gold?    This is especially hard for those who have all their wealth stored in gold.   How do they live… off the black market… always at risk?

Despite these risks… gold has a place.   I own gold… but see do not see my holdings as  an investment. To me gold can be both insurance and speculation.

Gold as insurance. This is the gold I set aside in a non banking safe deposit box, hoping it will never be required. This is insurance against a currency or personal meltdown. I keep enough for about a year’s worth of living and mentally write off any cost as insurance.

Gold as a speculation. The considerable volatility of gold’s price offers many speculative opportunities for those who like to trade.  I am not a great trader myself (too busy in my business and too nervous to be a trader) but one ratio I watch is the platinum gold ratio.


Platinum normally sells for quite a bit more than gold. Right now the ratio is about .80.  This means that a dollar’s worth of gold will buy .80 cents worth of platinum.

Any time the ratio reaches 1.00, in other words the price of gold and silver are the same, I buy platinum and sell gold.  Different traders use different guides to make decisions about speculating on the price of gold.

As mentioned I do not trade often because I focus most of my time on my publishing business.  To me a good business is as good as gold… in fact better than gold as a way of assuring everlasting wealth and to combat inflation.

The greatest asset of all is the ability to earn wherever you live.

This is why we offer our course Tangled Web… How to Have an Internet Business.

Many people are unhappy and blame this on their work. They want to abandon their jobs, hoping to become rich. Quitting work is usually to their ultimate chagrin because they often find themselves unhappy and unemployed.

Making money in business is easier than any other way and modern technology, low cost computing, inexpensive transportation and cheap, reliable communication makes it simpler to have your own business today. Small, fast and flexible are now beautiful in business! We’ll rarely understand a business better than one we own ourselves.

When you have your own business you can have the following benefits:
1.    Do what you like
2.    Act beyond money which isn’t everything
3.    Work only with people you like

A PIEC Experience

PIEC is an acronym for “Personal Income Earning Corridor”.  This is my concept of how to live and earn with financial prudence. This differs greatly from traditional approaches of accumulating wealth.

Instead of working for money to save and invest.  PIEC investors focus their prime effort on doing something they enjoy right now. Then they learn how to enjoy the effort in some profitable way. They learn to create “Avenues of Abundance” that combine lifestyle with the necessary task of accumulating wealth.

For example, if a PIEC investor loves golf; instead of working six days a week, 50 weeks a year just to golf on Sundays and during short vacations, instead he’ll create a business in some aspect of the golfing trade.

In another example, a client of mine, who loved animals became a vet. But he learned that the vet’s lifestyle was not one he enjoyed. He wanted to travel and move around, which is difficult for a professional who needs to stay at his office and build a practice. So he built a business that prepares special animal foods for race horses. Now he travels globally visiting horse breeders and makes much more money as well.

PIEC investors combine money with time, energy and desires. They generate income doing something desired. Desire and fulfilment become at least as, if not more, important as the money.

Do What You Love!

The reason PIEC investing works well is that when we love to do something, we do it better, for longer and with greater enthusiasm.

These are wealth building attributes that cannot fail. Yet PIEC investing does not mean we should suddenly abandon our jobs and try becoming golf pros, when we have never been able to break 100. Smart PIECS often require a gradual approach.
For example, as a writer and lecturer, I was never fully satisfied sitting behind a desk or standing on a podium all day long, even though I was making over a million bucks a year. I’m the physical, outdoors type and yearned for exercise and the wilds of the deep woods. “What good’s the money if this isn’t fun?” I often asked myself.
Rather than quit writing and teaching, I looked for ways to combine these professions with the outdoor life. Through research I learned that many city folk like myself yearn to be in the primitive outdoors. So I bought an isolated farm high in the Blue Ridge Mountains and an Andean plantation high in Ecuador where I am developing seminar centers with charming but simple dwellings, set in rustic surroundings, with clean water and pure air. Now I can teach in a primitive setting and after I finish the writing or talking, I run up into the woods with an axe and clear another cabin site or something physical like that. I’ve combined my writing with physical work and have blended the life I want, with my readers’ needs in a way that makes great financial sense. The cabins are projected to bring more profits than most stocks or bonds could ever return.

The process took six years to shift and we are far from finished. But while I’m doing what I love, who cares? This is one of the great benefits of PIEC investing. We can slow down and enjoy the work instead of always rushing ahead, looking for something more.

Those who work nine to five can start PIEC businesses part time if they are too uneasy to quit their jobs. Others, who like myself, already have a business can slowly shift their product or service in a sensible way and let it evolve toward their PIEC.

Gold in the Three Layer Financial Plan

PIEC businesses do not put all their money in just a business (though at times it may).

Diversification is always good. PIEC diversification again departs from the financial planning norm.
PIEC portfolios come in three layers, first the business.

The second layer is of very safe investments. This is where gold as insurance fits in.

The third layer is a  smaller layer of speculative deals.

This is where gold as a speculation fits in.

The majority of PIEC diversification should be in stodgy, liquid investments such as utilities, CDs and bonds with gold, silver or other precious metals as a balance.

These investments might pay little in the short term, but are safe and they are highly liquid at a known price.   The low return on these investments is acceptable because they support your PIEC business which makes profits like few other investments can. The non gold, very safe investments act as reserves if your business hits a sticky patch and can provide ready finance if sudden business opportunities arise. They also don’t take up much time in research, accounting, watching the market, etc. so you can devote your energy doing what you love (your business) instead.

However, if you genuinely love researching and tracking the market and have the mentality, capital and experience for it, just being an investor can be a wonderful PIEC business in itself. You can be a gold speculator if you really love the yellow stuff.

The third layer of diversification can be speculative because modern portfolio theory suggests that safe investments are enhanced and made safer by adding a small amount of higher risk deals. This also allows us to fulfil any casino mentality we might have left if having our own business is not enough.

PIEC investing makes it easier to create and keep wealth. It enhances our lifestyles now, because it lets us make money being who we really are. It makes life more fulfilling and fun.


Join us for a course or tour on international business and investing.

Here are comments from a reader about the way we help:  Thank you for your inspiration and information outlining foreign banking and retirement.  Your comments and suggestions are welcome for planning the steps to evaluate the early stages of living abroad.

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