Preparing for the End-Game of Gold and the Dollar (GS)

Tom Cullis here. Kevin McElroy is taking some time off to be with his wife and their new baby boy. He'll be back! But in the meantime, he's asked me to discuss a concept known as Free-Gold. You can read parts 1 and 2 by clicking here and here.

Here's what could happen with the dollar and gold in the not-so-distant future.

To look forward, we must look back - to Weimar Germany.

If central bankers do what the Reichsbank did during the early 1920s and they continue to look at inflation and interest rates for their cues as to what ails the markets and what should be done about it the dollar will be destroyed.

More likely, however, is that even the academic monkeys pulling these levers will demonstrate an ability to learn. They will, slowly at first for sure but eventually with the expediency of someone trying to save their own neck, come to the conclusion that the only way to save their currency is to start listening to what the gold market says.

If the price of gold leaps upwards they will have to tighten their policy, if it dips they will have some leeway to loosen.

Why would the Chairman of a central bank start doing this? Why give up some of their sovereignty and power to the market?

Because they will have to.

The market will be fighting about being forced to take losses and try to push back. As we know, thanks to the power of the printing press, the Fed and other CBs can't actually lose money nominally. They can print it. So the only way for an average person to push back is to fight the market power of each nominal dollar.

Everything comes back to the initial problem and question- who will take these losses that already exist but have yet to be doled out?

Free-Gold is a realization that the best route for the individual outside of the banking system is not only owning gold, but also in holding gold for long periods of time. Central Banks will eventually be backed into a corner that they cannot escape from. The only recourse they will have will be a compromise between them and the general public in the form of using the gold price to strongly influence their policy.

The investment ramifications of Free-Gold verses other possible outcomes, specifically a return to the gold standard, are subtle but logical. The likelihood of the gold standard (GS) returning without massive confiscation of personally held gold is very low.

An attempt to return to the GS during a time of crisis would risk a huge run of people changing their dollars for gold from the government as it would be an absolute signal of the failure of the old regime.

Attempts to return without convertibility would signal weakness and cause black market prices to spiral out of control. Realistically the only feasible attempt that could be made would be first to confiscate large enough sums of gold to handle the inevitable early run once the plan was announced.

There is no such problem with Free-Gold. Attempts to confiscate will cause a run on the dollar as the sacred gold price will be the olive branch the government uses to try to coax the markets confidence back. This makes public holdings of gold in the form of ETFs (as long as the ETFs are actually holding gold) much more secure under Free-Gold.

This is why ETFs who can verify their positions are my favorite play with their relatively low cost of purchase and ownership. If you do not feel comfortable with the verification of their gold holdings pure, physical gold is the only route one can take under this scenario. If you also come to believe that this process will take several years the benefits of ETFs are slowly eroded by their holding costs and again physical protection is the only way to go.