Saturday, August 26, 2017

Gold Wars

Gold is not the main focus of this blog although it is an important signal we monitor that can indicate that something important may be happening the in the monetary system. Gold has been in and out of the official monetary system for a long time so people do view it more like money than just a commodity like zinc for instance.

Gold tends to generate a lot of emotional reaction from people who love it or who seemingly hate it for various reasons. There are all kinds of articles and blogs that discuss gold and its love/hate relationship with the monetary system. For instance, the same people (central banks) that tend to disparage gold as something out of place in a modern monetary system also happen to hold tons and tons of it in their vaults. The tension that clearly exists when gold is talked about as an alternative to the currencies of the central banks is really there and there are many places that cover those issues.

What I would like to focus on for this article is to look at some new developments in the gold space that may indicate that interest in gold as some kind of alternative payments system might be increasing. Below are some thoughts on it.

Gold has always been something people around the world look to when there are signs of potential trouble in the world. The most recent example is the flare up between the US and North Korea. When the rhetoric ramped up to a level where people began to pay attention and think an actual shooting war might be possible, gold immediately reacted. People like Ray Dalio were instantly suggesting everyone should own at least 5-10% of a portfolio in gold as an insurance hedge (something we have long talked about and people like Jim Rickards have consistently recommended). Readers should understand that no where near that allocation to gold exists currently and if fund managers and investors actually followed that advice, the demand for gold would explode far above the amount that is available at any given time and the price would explode along with it.

The potential for something like this to happen is always out there even with gold no longer used like money as part of the monetary system. Now we have private sector initiatives popping up that are actually trying to modernize gold in a way they hope will encourage people to use it more like money again and not just as an insurance hedge or long term store of wealth. Goldmoney was the first to enter this space and tries to make it easier to use gold in your account with them like money to spend in commerce. This is how they describe their debit card on their web site:

What is a Goldmoney Mastercard® Prepaid card?

The Goldmoney Mastercard® card is a prepaid card available in several currencies that can be linked to verified Full Holdings. You may sell metals to currency within your Holding to load a prepaid card and use it anywhere Mastercard is accepted.
Recently, BullionCoin launched with a more extensive plan to try and get a 100% gold (and silver) backed cryptocurrency to be used in commerce. They do this by offering an incentive to merchants to accept BullionCoin in payment for goods and services and will also offer the end user a debit card for purchases. To the end user it will work the same as any debit card they already use at merchants that accept BullionCoin for payment. It appears that perhaps the first shot in possible Gold Wars may have been fired at BullionCoin as the ABX announced it was pulling out of its partnership with BullionCoin based for one reason on the potential for a lawsuit filed by a "competitor" for "alleged infringement of intellectual property rights" (BullionCoin fired back by denying any lawsuit exists).

Now we learn that coming up in the fourth quarter of 2017, another gold linked payments system called GlintPay plans to launch as well. The article appearing in TechCrunch on Glint had this to say:

"However, I understand that Glint will offer a frictionless way to both store and spend your money in gold, including at the point of sale, just like a regular local currency. The bigger picture is that gold historically has been a better storage of value than any government-created currency, and therefore — with the aid of technology — is (arguably) a good candidate for an alternative global currency. The startup has already been authorised and is regulated by the U.K.’s FCA, under, presumably, an Electronic Money Institution license."

So we are clearly going to have competition now in the gold backed payments system space with blockchain also entering the picture for some of the products. This Bloomberg article lists some more coming soon that will be based on blockchain. We can expect that these private ventures will compete aggressively for the existing base of consumers who like to own gold and silver even as they all also try to expand that base of people with global marketing efforts. This is where we may see some additional Gold Wars in the future as we have already seen with BullionCoin. Whoever can attract substantial institutional support may gain an advantage in these wars as promotion and marketing helps influence people to try something new.

It will be interesting to see how these new private ventures impact the gold market and how successful they are in attracting broader adoption of gold backed currency for use like money in regular commerce. They will all be fighting legal tender laws and probably tax reporting rules that will be obstacles to overcome in many countries. 

But if they are successful in bringing in lots of people globally who are not currently interested in owning gold and silver, their impact on those markets could be significant as a new source of demand for physical gold and silver. This could be true  even if some of these products cannibalize from existing gold buyers. Right now it is estimated that just 1% of global capital is invested in gold. A seemingly tiny increase to just 2% is actually a huge increase in demand for the physical metal in relation to the available supplies from mining each year (which are starting to drop off). The same concept applies to silver. It bears keeping an eye on in the future as the Gold Wars heat up.
Added notes: While no one can predict the future, this article on silver does make some good points about how it appears to be undervalued at this point in time. Silver is selling at a price not very much above what it costs to mine it and it looks like mine production may have peaked out and is starting to decline. Eventually the price of silver has to react to this situation or some mines will have to be closed which will speed up the decline in production. Meanwhile, demand for silver is likely to remain steady or increase in the coming years with nations like China in the middle of large programs to expand the use of solar energy. Also, any time demand for gold picks up as an insurance hedge, silver tends to benefit from that as well and is more affordable for the average person.

Treasury Secretary Mnuchin created quite a stir when he suddenly showed up at Fort Knox to seemingly check out the US gold stored there. This created an immediate renewal of the ongoing battle between those who believe that much of the gold supposedly held at Fort Knox has been sold off and those who say the physical gold is still there, but may have ownership claims against it on paper (has been swapped or leased). Of course, since the gold has not been audited for many years, no one can prove their claims one way or the other. It is somewhat odd that Secretary Mnuchin suddenly shows up for to do this photo op holding a gold bar. We won't speculate here because we leave that to others. The fact this week is that for whatever reason, the Treasury Secretary of the US showed up at Fort Knox to say "the gold is safe" for some unexplained reason.

Andrew Maguire surfaced again to do a new interview with King World News. In this interview he repeats that the 250 ton gold buy order he has talked about most of this year is still coming, but has been delayed past the date he initially expected. As we might expect, after the partnership between BullionCoin and the ABX fell apart, the credibility of Andrew Maguire is in question by many people who follow events in the gold market. All we can do here is report what happens. So far, the prediction of this large gold buy that is supposed to "reset" the gold price much higher has not materialized. The failure of BulllionCoin and ABX after much promotion of it by Andrew Maguire on his Twitter feed (see documented list of all statements made in 2017 here) does not inspire confidence. If such a large gold buy order does in fact show up and cause a much higher "reset" of the gold price, we will report that here. If it does not, we will also report that here. It seems there are all kinds of Gold Wars out there and discovering the truth is quite difficult. This is why we try to avoid speculation and report what actually happens.

In this new article, Jim Rickards says "Weird Things are Happening With Gold"


  1. Competition is good. Will keep an eye on these and also the asset backed crpytocurrencies to see which ones survive. As you state, the biggest hurdle is going to be the legal tender laws and tax treatment: are they going to be treated as currencies or investements by our governments?

  2. I am reminded of the IMF paper on cryptocurrencies you discussed previously. Lots of issues to be worked out globally, so the excitement seems a little overhyped to go along with the price.

  3. The best information I have at this time suggests that before we would see any kind of new "global currency", we will see individual central banks issuing "digital" versions of their own currency. Since currency they issue now is also mostly "digital" anyway, this is really more just semantics than anything else trying to capitalize on the latest fad which is blockchain. If you talk about a currency being based on "blockchain" you are perceived to be on the "cutting edge" of technology. It's more marketing hype than anything else imo. Banks are suddenly interested in blockchain because they think it might cut their costs some and they can market it to the public (that has no idea what blockchain actually is) as "cutting edge" technology. I would watch for the first central bank to issue a "central bank digital currency", perhaps in Singapore (or China). That will be the start of the process in my view of trying to convince the public central banks have joined the blockchain revolution while still simply issuing the same currency they have been issuing all along. To some extent, much ado about nothing in terms of a new global currency. The real impact for now will be lower cost money transfers and payments using existing currencies for people who need these services the most.

  4. Harvey may be the black swan that creates a crisis

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