Monetary Disorderand the Role of Gold

The ongoing role of gold in the global financial system and the prudent management of money

Louis Boulanger, CFA, Founder & Director, LB Now LimitedPresentation at a series of IAIP events in India, August 2012

“The reigning error of mankind is, that we are not content with the conditions on which the goods of life are granted.”

Samuel Johnson

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Important Notice and Disclaimer

This presentation and any investment views expressed in this presentation handout and verbally in the presentation itself are for general information purposes only. To the extent that any such information or views constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax , accounting or other nature. We recommend that recipients seek advice specific to their circumstances from their adviser before making any investment decision or taking any action.

The information in this presentation is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgement at the date of provision of the presentation and are subject to change without notice. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Reference to taxation or the impact of taxation does not constitute tax advice. The rules on and bases of taxation can change. The value of any tax reliefs will depend on your circumstances. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this presentation or its contents. No person guarantees the performance of any investment made as a result of advice from Louis Boulanger or Louis Boulanger Now Limited. Personalised financial advice from Louis Boulanger or Louis Boulanger Now Limited can only be provided after you have read the appropriate Financial Adviser Disclosure Statements.

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All truth passes through three stages.

First, it is ridiculed.

Second, it is violently opposed.

Third, it is accepted as being self-evident.

Arthur Schopenhauer German philosopher

(1788 – 1860)

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The Bhagavadgītā (or Gītā) refers to three types of discussions (based on which guṇapredominates at the time):

• Vāda (sattva) • Jalpa (rajas)• Vitaṇḍā (tamas)

Vāda is the type I hope we get here today: an open-minded discussion which aims to arrive at the truth. The other types achieve nothing but satisfy Ahaṃkāra (our egos).

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AgendaMoney…

on its origins and the role of the state

Gold…on why it is money and nothing else

Crisis…the true nature of the ongoing crisis fiat abuse and the new currency warsthe predicament facing our profession

Bullion…demystifying what is and is not bullion

About money…

“In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and godlike intelligence for kings.”

- Aristotle(384 BC - 322 BC)

All currencies are fiat moneyWhat’s ‘fiat’ money?

money declared by a government to belegal tender (i.e. bank notes or paper money)

What’s ‘legal tender’?an offered payment that, by law, cannot be refused in settlement of a debt

Examples of fiat money?Federal Reserve Note (better known as US dollar)Reserve Bank of India Note (known as Rupee)

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On the origins of money...Carl Menger’s essay (1892) is the most important reading source to fully graspand understand the true origins of money

a social phenomenon of practice/habit

money is... a social (not a state) institution

a gradual realisation of the different degrees of saleableness of goods and commodities

money is the “unpremeditated resultant” and“spontaneous outcome” of human actions

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The role of the state...Came much later...

Precious metals became money before ‘coins’

Not as a rule, but because of their saleableness

No accident or state compulsion effected this

State recognition and state regulation of what people had already decided was money:

caused the state to coin (administrative role)perfecting use of precious metals as money

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How is money defined today?

Money is anything that is generally accepted as payment for goods and services and repayment of debts.

The main uses of money are:1. as a medium of exchange;2. as a unit of account; and 3. as a store of value

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Is this ‘good’ (sound) money?12

It’s not a good store of value! 13

14Can you spot the differences?

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Used to be backed by something tangible, like gold/silver (i.e. used to mean something)Now, it’s backed by nothing and no longer redeemable in anything but another one like it!

No longer states that this is a certificate (silver or gold)It’s now merely a note (i.e. debt) issued by the central bank

Here is that legal tender privilege

What’s wrong with this picture?16

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“If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered.”

-Thomas Jefferson(1743 - 1826)One of America’s Founding Fathers;3rd President of its United States (1801-09)

Well, guess what?It’s already happened!I call it the ‘Monetary Tragedy of the 20th Century’

1910: the Fed is surreptitiously created 1913: the Federal Reserve Act is passed1933: gold possession becomes illegal in US1971: END of gold exchange standard set in

1944 in Bretton Woods (President Nixon unilaterally declares US dollars owned byforeign states are no longer redeemable in gold, as was intended by the BW system)

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Measures of ‘money’

Lots of aggregate measures of its supply

M0, M1, M2, MZM, M3, etc.

But what of the basic unit (of measure) itself?

Nothing to be found in absolute terms

Abundance of data in relative terms:• Currency exchange rates• Price level in terms of currencies

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Standards of measurementIn all scientific endeavours, the standard used for units of measure is fixed; it does not float!

Think of weight, length, time: the precision of their units of measure even improved over time

The ONLY exception is economics and, in particular, monetary economics

Fiat money floats! It is based on what could only be described as a highly elastic measure

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Gold as a unit of measure…21

The role of gold

“Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

-Alan Greenspan(1926 - )In a speech to the US Senate Banking Committee in May 1999

The role of goldGold is the ultimate extinguisher of debt

Alan Greenspan stated that very clearly many, many times.Gold is an honest check on the amount of leverage that canbuild in the financial system.

Gold is the best substance known to man toserve as a standard measure of value and tokeep circulating money honest (USD=1/35thoz)

This key knowledge has been lost graduallyand especially since 1971 (Moses Principle?...)

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Far from a barbarous relic…Gold is one of the world’s most misunderstood assets

Powerful ‘governors’ of its ‘price’, especially nowDespite this, gold remains valued around the worldWhy? Because natural law >> man-made laws…

“Gold is money and nothing else” J P Morgan, 1913

It cannot be debased by creating it ‘out of thin air’by government fiat – like all currencies today

Gold is nobody’s liability (unlike other financial assets)

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Why gold is uniqueThe only commodity produced for accumulation

Entire aboveground gold stock is ‘160,000’ tonnes

Gold’s supply is its aboveground stock This is crucial to understand the true role of gold Gold has the lowest diminishing marginal utility of all goods• that’s why it’s money: a reliable standard measure of value

Amount of gold mined each year still only increases theaboveground stock year after year by about 1-2% p.a.

A gram of gold mined today is no different from a gramof gold mined by the Romans two-thousand years ago

Is gold a bubble?(Answer: next slide…)

“Gold is the canary in the coal mine”It signals problems with our fiat currenciesIt signals that it is time for monetary reformUntil then gold will continue to rise in ‘price’• first as an alternative money to fiat currencies• later as a numéraire or anchor for the system

The rising ‘price’ of gold is a mere reflection of agradual and managed remonetisation of gold

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The truth about gold is…That most people simply don’t own it…yet!

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Everything did change in 200128

Source: http://www.sharelynx.com/gold/AUVolatility.php

Price governance evidence?29

Source: http://www.sharelynx.com/gold/AUVolatility.php

About this crisis...

“We cannot solve our problems with the same thinking we used when we created them.”

-Albert Einstein(1879 – 1955)A man who should know…

US debt (i.e. US$) is the key!Since 1961 the US national debt has never gone downIt took the US government 191 years – from 1791 until 1982 –to run up its first US$1 trillion in debtWhen G. W. Bush was inaugurated the debt was US$5.7 trillion

The debt stood at US$10.6 trillion when Obama took office

Obama has already added more than US$5 trillion to that debt (it now stands at US$15.9 trillion OR > Europe & UK combined)

Debt ‘ceiling’ was increased (93rd time!) by US$2.4 trillion fromAugust 2011 to January 2012 and now stands at US$16.7 trillion

Will what’s left be enough to last until the Presidential elections?

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Picture taken in 2009… It’s more than $50,000 now… and growing!

The true nature of this crisis

It’s not a credit crisis

It’s not a banking crisis

It’s not even a financial crisis

Nor is it a sovereign debt crisis

The above are real... But just manifestations of:

The Unfolding Global Monetary Crisis

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Irredeemable currenciesWithout the ability to redeem fiat money (i.e. any paper currency) at fixed weights in gold,paper money as a result is only as good as:

the ability of the issuing state to pay its debtsAND

the belief that holders of that money (or anyfinancial asset denominated in that currency) have in its value being preserved by the state

It’s all a confidence game! (with central bankers as croupiers)

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How they maintain confidence?By perpetuating ignorance!Are you familiar with cognitive dissonance?

Study shows* the less people know aboutimportant and complex issues, the morethey want to trust the system and avoid becoming well-informed

* Source: Journal of Personality and Social Psychology

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The deception now relies on…Keeping interest rates artificially low

and…

Making you believe this is a good thing

and…

Making you forget about real INFLATION

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WHY?

To ‘service’ that public debt!

Keeping interest rates low is crucial

By monetizing the debt (QE) if necessary

By hiding the true inflation (in credit derivatives)

Or… by outright manipulation (think LIBOR!)

In the meantime…financial wealth is being surreptitiously erodedthis means financial repression for many (savers, working middle class, retired) who ‘trust’ system

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1st ZIRP (!) and now… NIRP?

ZIRP: zero interest rate policy

NIRP: negative interest rate policyalready trialled in Germany (2yr yield -0.06%)

Both of the above relate to nominal rates

What matters is REAL interest rates (RIRP??)if positive? good for bonds / not good for goldif negative? good for gold / not good for bonds

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Gold and real interest rates…39

Source: US Global Investors’ Investor Alert dated 2 September 2011

Financial fraud is rampant

Bill Black: “Our System is So Flawed That Fraud is Mathematically Guaranteed”

The most effective act against trust is fraud

Financial fraud is the most damaging type of fraud and also the hardest to prosecute

Weapon of choice in finance is accounting…

1st MF Global, then JPMorgan & now LIBOR!

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Meanwhile…Central banks are buying gold!

After being net sellers for decades...

Central banks bought 440 tonnes in 2011

That was the highest amount since 1964!

Net buying trend began in 2nd half of 2009

2012 to June, official* purchases > 220 tonnes

What about India? China??...

* Sources: World Gold Council, IMF (as reported)

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What is China doing? BUYING42

Official gold reserves (WGC)Official statistics are reportedvoluntarily by countries

Not all countries report their holdings

China’s last official reportwas in 2009; before that it was in 2003 (400 tonnes)

US gold reserves still at #1?

Eurozone countries have more

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Currency War III (2010 - )

The Warning: Japan’s Lost Decade and LTCMThe Prelude: Glass-Steagall, Swaps Repeal, VaR, Basel IIIChinese export model meets U.S. consumption model

Greenspan and Bernanke “puts”The Depression of 2007 and the Panic of 2008

Aftermath: Debt, Depression and Deleveraging.....Again

Origins of a Currency WarExamining Growth – Fiscal PolicyRoots of Currency Wars are in debt, deleveraging, deflationThe debt overhang impedes growth for a decade or more

Fiscal Analysis

GDP = C + I + G + (X – M)

Origins of a Currency WarExamining Growth – Monetary Policy

Monetary Analysis

pY = Nominal GDPY = Real GDP and p = Inflation/Deflation

M = money supply and V = velocity of money

MV = pY

Monetary Math is Easy!

1 + 4 = 5

4 + 1 = 5

Nominal debt requires nominal GDP growth

A fundamental truth… and a few postulations Government debt is the basis for fiat money

This system is being questioned more and more

Government debt is still the key component of thecapital held by banks (think LIBOR rigging scandal)

Government bonds may no longer be able to providethe ‘risk free’ foundation for investment decisions

Because government debt has a systemic role thiscrisis can be expected to spread a lot and get worse

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To invest or not to invest? TITQ

Negative real interest rates have historicallybeen good for gold and not for investments

Ben Bernanke says zero rates are here to stayuntil at least late 2014 (or for total of 6 years)

The Fed, BOE, ECB, basically all central banksare expected to continue to debase currencies

This means real interest rates will likely remainnegative for quite some time to come…

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“There is an interval of time between cause and effect which can sometimes be so short as to deem worthless an understanding of the process connecting them. Knowing that the pulling of the trigger precedes the release of a bullet provides scant opportunity to take evasive action. In the case of the consequences of an over-accumulation of debt, the opposite problem presents itself. Sometimes the interval between cause and effect appears to be so long as to separate them by oceans of doubt.”

Peter WarburtonAuthor, Debt & Delusion (above from page 246)

Warburton’s warning:

The economic and financial advancements ofthe Western World since the mid-1980s rest onshaky foundations

It is only a matter of time before this unstable credit structure collapses under the weightof its own absurdity (think ‘Tower of Babel’)

The only question is: how the delusion will ultimately unravel…

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Our profession’s predicament…CFA Institute advocates market integrityBut markets are increasingly rigged…Systemic Risk Council initiative is excellentMeanwhile our monetary system is failing…CFAI must also advocate for monetary reformIndividually, our fiduciary duty requires that:

we understand what money is (and is not)we recognize that gold has a dual role to play:• as client wealth protection against systemic risk• as a standard measure of value for honest money

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Let’s get physical!

“Gentlemen, in order to measure, you must define your unit.”

- Isaac Newton(1643 - 1727)English physicist Master of the Royal Mint

‘Bullion’ ‘investment’ categories

Physical metal holdings

coins or bars

Near physical holdings

allocated storageunallocated storage

Pseudo bullion or paper (investments)

certificates, derivatives, shares, ETFs

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Physical vs. paper gold/silver

Physical:Bullion coins (e.g. Maple Leafs, Krugerrands)London Good Delivery bullion bars (e.g. 400oz)Numismatics (rare coins; like art and stamps)

Paper:Certificates (e.g. Perth Mint Certificates)Derivatives (e.g. options & futures on COMEX)ETFs (e.g. GLD listed on the NYSE)Shares (e.g. Newmont, Oceana Gold)

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Near physical holdings

ALLOCATED storage/custody:you OWN the gold or silver bullionyou hold legal title to that bullionyour asset is nobody’s liability

UNALLOCATED storage/account:you are OWED the gold or silver you are an unsecured creditoryou have credit/counterparty risk

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But remember… it’s only money!

You’ll need to sell your bullion eventually

Bullion ownership merely stores wealth

Bullion in itself is not an investment

It’s money waiting to be redeployed (invested)

Only when you later sell your bullion to buy stuff or invest that money again will yourwealth increase (assuming you invest wisely)

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Investing in precious metals……may well be a great idea right now

…but this presentation was NOT about that

The aims of this presentation were to:

recall the role of gold in the financial systemargue that a monetary reform will be inevitablepropose an interim solution to protect wealth…by partly deferring investments (owning bullion) and encourage you to (re)learn what ‘money’ is

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Thank You.

Louis Boulanger, CFAFounder & Director, Louis Boulanger Now LimitedP O Box 25 676 St Heliers, Auckland 1740, New Zealandtel: +64 9 528 3586; mob: +64 275 665 095;louis@lbnow.co.nz; www.lbnow.co.nz

Any questions?