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February 2021
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THE SOURCE OF POWER OF CENTRAL BANKS Once we will realize that Central Banks (with commercial banks) are just playing the game with the rest of the world with virtual magic tricks - their fiat currencies, suddenly clearer image emerges. Central banks could offer REAL MONEY - gold-backed gov. currency to the people.... but in this case their power AND OWNERSHIP OF THEIR GOLD would be turned over to the people. Such state of affairs is highly problematic for the central banks.... People own real assets: land, homes, their businesses, commercial real estate, some precious metals, equipment, cars, etc. Corporations own factories, patents, all kinds of machines, equipment and also real estate. Point is, non-central banks entities own real assets. Central bank cannot have a worse financial standing by owning only their own fiat currencies.... People always had the ability to barter: exchange all real things (homes, their products and services, resources, etc) with other physical things. However such monetary system - exchanging one thing for the other is impossible in the world of large international trade, thousands of industries, innumberable market niches. We need universal unit of account or some broadly accepted measure which can value different things against each other. Also, we need to slice the big economic project such as a big corporation to a smaller pieces (stocks), so many investors can participate under common regulations. What the banking cartel invented for its own goals is a type of asset which is virtual - fiat currency. With fiat currency it was easy to create another magic trick - debt in the form of government bonds. With these instruments widely forced into a population it is easier for the banking cartel to gain economic power without providing any real-world product or service, which is costly and requires work. Together with governments, Central Banks establish what is legal tender in a country and under what conditions whole country can borrow money.... from none other than... central banks, of course! THE MAGIC OF FIAT MONEY PRINTING Once you are able to create money and debt out of nothing, you are able to buy physical assets with such money at the cost of.... zero. Currently, only politicians/governments need the option to spend more than they earn (collect from taxes), which is why they need central banks to create debt and fiat currency out of nothing. We know the rest of the story, we then pay for current gov. spending with future inflation. The debt can be in the form of government bonds or direct printing called Modern Monetary Theory. Gov. Bonds hibernate inflation in time. MMT has more immediate effect on inflation. What happens when politicians who opt for huge gov spending won't be ellected anymore? What happens when the public will see through the trick and will not buy gov. bonds anymore? Central banks structure of control will be under fire. Without the buyers for gov bonds, CBs must use MMT - printing currency directly, without issuing bonds. MMT causes much faster inflation since everything printed lands directly, without time delay, as demand in real economy. Bonds and fiat savings are just hibernated, frozen claims on real assets, when exchanged for real things, also fuel inflation. Sooner or later hyperinflation sets in and nobody wants CBs virtual currencies and bonds. What is left in central banks arsenal? It can only be some real asset, as public does not want virtual/paper. GOLD SETS IN The only asset which:
Thats why gold is favorite, #1 asset for the central bankers to OWN. And these are exactly same reasons why the public should own gold (and other precious metals). When CBs own gold, they can issue gold-backed currencies, and still be somewhat in the game. However, over time, people are likely to redeem physical gold, if they don't trust the Central Bank. When they redeem gold, Central banks are - again - left with nothing. The only ways Central Banks (and the whole banking/corporate cartel) can still be relevant in the economy are:
In my opinion we see all of these strategies being employed now. In 2010 Rothschild family investment fund bought large stake at BullionVault. This company enables trading of precious metals stored in vaults. BullionVault enables customers to trade physical precious metals between themselves like stocks on the stock market. Soon, they could offer payments in the form of ownership of vaulted precious metals. Point is - this company can act essentially like a commercial bank, but a bank which offers "currency" fully backed by precious metals. The same Rothschild fund recently invested in Paxos (Dec 2020). Paxos offers digital cryptocurrency backed by gold. StateStreet, BlackRock Vanguard and Fidelity all own big stakes in all major metal mines. These for funds are suspected of being mostly owned by the same entities that own Federal Reserve and ECB. OLD MONOPOLY OF MONEY AND WHY TECHNOLOGY CAN BREAK IT Central banks will always look for opportunities to:
What they fear the most is ... being irrelevant in economic space. What could end central banks monopoly over money creation and distribution? Centralization is defeated by de-centralization. Once ownership records are smartly distributed across tens of thousands of computers without hacking ability and once gold and silver, as money, is distributed widely across people, the power to control the banking and monetary system will be greatly diminished. The reality is that we now have the following ecosystem of:
Finance is getting increasingly de-centralized and not needing central "distribution" authority, besides regulation and complaince. In recent decade what truly turned out to be nail-in-the-coffin of centralized finance is distributed ledger technology, which makes centralized record keeping largely obsolete. Every single economic reason for the large banks to exist in traditional form is now being thrown out of the window. We now have all the pieces of the puzzle to establish new financial system where capital can be invested, borrowed, spent, transferred across the globe quite easily and efficiently. Free market forces, competition and talent ALONE will dictate who gets money and in what amounts. Technologically, we are able to have perfectly decentralized finance. Politically, its a nightmare for people in positions of power, as they will lose all control. What I see in the near term horizon is a clash between these two worlds:
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Cryptocurrencies are called... currencies, but are they really more like currencies or rather stocks or... gold? Nassim Nicholas Taleb in his brilliant book "Antifragile" presented the concept of fragility according to which you can classify, economic systems, things, companies, literally everything in the Universe... This is how financial and economic assets can be placed on this spectrum: As you can see, Cryptocurrencies and corporations (traded as stocks) both share the same category of being Fragile and Anti-Fragile, depending on their growth or decline in their market share. If they respond to outside changes in a way which makes them stronger - they gain value relative to other assets. If they are victims of outside forces in the economy or competition - their value will decline relative to other assets. Currencies and corporations happen to occupy very competetive space, where our imagination and creativity is the only limiting factor. Land, natural resources and to some degree real estate on the other end of the spectrum - are limited by nature. There are NATURAL limits of how much we can have them. Fiat currencies, as they are being forced by the governments can only be sensitive to political, economical changes and cannot improve their value vs real economy. As confirmed by all known history with currency printing ad infinity. Below is the Infographic showing where Bitcoin (and other cryptos) lie within other assets: Fiat Currencies, Stocks and Precious Metals: Bitcoin As Alternative To Non-Government Currencies?
My hypothesis, is that Bitcoin is an attempt to create another virtual tool, which seems to be an alternative to existing currencies and banking payment system. It is unclear who really was its creator: the existing banking cartel, or some group of influential people from Russia, China, South Korea or Iran? The facts are that bitcoin can be exchanged for many currencies and sent more easily across the world. The fact that it does not require centralized banking system to store ownership records and that its supply is not controlled by a single entity makes it superior to existing fiat currencies. However, it still shares one important quality with fiat currencies: it is virtual, it does not represent a claim on any real asset. Fiat currencies and bitcoin are both fragile. They are only one of the many possible currencies people can use, they are not the WHOLE universe, spectrum of monetary exchange, that we can have. This means, our whole financial system is able to improve over time (be anti-fragile), as billions of people learn by trial and error and system gradually improves. Bitcoin or U.S. Dollar are just temporary tools, which can be replaced. Bitcoin and fiat currencies compete with each other as means of exchange. Bitcoin seems to represent a more evolved form of currency. There is one feature that makes BTC not as attractive: the ability to track all transactions electronically. Is Bitcoin An Asset Like Stocks? Cryptos are traded on their exchanges, similar to stocks on NYSE or Nasdaq. But with BTC there is no need to actually build any company or any products or services offered to the people. The only qualities which Bitcoin shares with stocks are:
We can clearly recognize, that assets on the bottom of this graph, in yellow boxes: Precious metals and corporations which provide goods and services are not easy to create. To the contrary assets on top of the graph (currencies) in white boxes - can be very easily born. Somewhere after Great Financial Crisis of 2008, someone saw the incentive to create an financial instrument, cryptocurrencies, which have all the "benefits" of stocks - from the perspective of its creators and exchanges. But at the same time:
Is Bitcoin Like Gold? Bitcoin is sometimes called "digital gold". In my view, nothing can be further from reality. Bitcoin is the opposite of gold in every way, except that its supply is limited:
In my opinion, Bitcoin and Physical Gold are polar opposites of each other and perfect hedges to themselves. Bitcoin and Gold can co-exist in a monetary system, One can beat the other as mean of exchange. Gold cannot be beaten by Bitcoin in its industrial and jewellery use. What many people don't realize is that we can merge the properties of Gold with the properties of Bitcoin and thus create a currency and a store of value superior to any of the two in separation. How? Main weakness of physical gold as a currency is that it takes time and costs to send it over the globe. We can't also divide it to as precise number of units as Bitcoin. By tokenizing gold ownership and distributing its storage across hundreds of vaults around the world we can send gold-backed tokens to other users across the world without sending the gold itself. The gold will remain unmoved in hundreds of vaults, just its ownership records will change. And these records can be stored on blockchain. Currently there are few projects which offer a cryptocurrency backed by physical, vaulted gold: Dgld.ch, Paxos Gold and LODE.one Competition Among Various Assets By Market Cap Is Bitcoin a competing instrument to stocks, fiat currencies, cash or precious metals? Let's look at the numbers!
Source: https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ In light of these numbers, Bitcoin can be a serious competition only to Silver and potentially Cash and Gold. Stocks and banking deposits are out of its league for now - but that can change in the future. Bitcoin As Social Media, Operating System, Internet For Money? Lyn Alden, a popular macroeconomics blogger, suggested that Bitcoin might be viewed as a social network. We have a community which sends each other BTC, instead of messages, photos or videos. We have the same "network effect" as with social media, telephone or cell phones - the larger the network is, the stronger it is. When most people adopt it, its hard to function without it. Social media function is to share and spread information in comfortable and fast fashion. Similar to Bitcoin - its function is to send token representing value anywhere and fast. However, the difference is - we don't convert large value or large wealth when using social media to virtual tokens. Paid advertising is an exception. When using Bitcoin to sell a home, we will convert the real asset of large value to a virtual token. Until we convert that token to another real asset, we temporarily hold something which is not real, instead of a real asset. Of course, the other side of transaction who bought a home from us, delivered bitcoins, which could also only be obtained by conversion of some real asset or work. For short term, day-to-day, small transactions, such system seems perfectly legit. However, from the perspective of the long term store of value, we must look at the broader picture. Owners of any social media platform operate in competetive space, where other platforms can gain more users. Same like with Bitcoin - to store value in it long term, you have to be sure that many years from now people will still use it to the same or higher degree than currently. Can Bitcoin be treated like an operating system? Is some ways yes, since it operates like a distributed software. We can't run any other programs on it, aside from only one program- we can mine, buy or sell units, which have limited supply. As it has only a single functionality, it better do this job better than anything else we can imagine! Otherwise it will be a history - some other operating system will replace it. How about Bitcoin as the "Internet for Money"? Internet is a protocol of sending information across the web of computers. We can't value the whole Internet since no one owns any part of it. But with Bitcoin, we can actually own part of "Bitcoin, The Money Internet". However, what we actually own in this BTC Monetary Internet? We own part of the technology which is able to limit the units of BTC and give 100% certainty that your unit won't be hacked. And nothing more. Internet on the other hand has thousands of various uses. This simply means Internet as we know it now, has orders of magnitude higher internal diversification in its value.
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Let's compare gold and silver with other assets and means of exchange with each other, according to their fundamental, inner, core properties, acting as currencies or liquid, acceptable assets, that generally retain value in the short term: Note: This table and scores only show these assets internal potential as currencies. Currently, ETFs, REITs, stocks and real estate cannot be exchanged directly for other assets, except for government fiat currencies. However, this may change in the future. Score of 5 is the highest note, 0 - the lowest. "Scarcity", "Hard to replace" and "Volatility" measure how much an asset is likely to retain its value in the short term. The above table shows the following:
Fiat currencies play a role as currencies and poor stores of wealth. Land and real estate, to the contrary - they are good stores of wealth, but not good currencies/medium of exchange. Precious Metals backed tokens, REITs and Stock Index ETFs can merge these roles - they represent real assets, and they can be traded quickly online. They could be both a currency and a store of value. However, they cannot be currently directly exchanged for other assets, except government currencies. This table presents how each each assets can be ranked according to its store of wealth or value:
Goal of most people is to have some part of their portfolio in liquid assets, but at the same time store as much value as possible. This is how each of these assets will score, when we will take 30% of the score as a currency and 70% of the score as a store of value:
This means that in a portfolio, to maximize its liquidity and potential long term value you rather want to focus on the last 4 assets than the first two.
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One ounce of silver is currently trading at 22 USD.
1. Kindle Paperwhite Waterproof ebook reader price $129.99, weight about 6 oz. Six oz of pure silver: $132 2. Cheapest Apple Watch, weight about 1.5 oz, price: $199. Pure Silver 1.5 oz: $33. 3. Iphone SE 2020. Weight: 5.22oz. Price: $390. Pure Silver 5.22 oz: $115. 4. The premium on 1 oz Maple Leaf coin, one of the lowest among coins, is currently 60 USD at SDBullion.com This premium alone - the cost and profit to mint and sell the coin, NOT TO MINE its gold - is higher than the price of two, one-oz silver Maple Leafs coins with their premiums included. In other words: please ask yourself: are the economics to just mint the gold coin, which is done by machines in vast quantities and sell it online twice as expensive as actually mining, minting and selling the same coin, but made of silver? Mining includes: buying the mine, huge operating costs, taxes, all kinds of risks, huge power usage, etc. Most likely not! What is more realistic economically, is that with price of silver at $100 and with gold prices still at $2000 per oz, gold coin premium of $60 would only buy 0.6 oz of silver coin. It would mean more natural, 20:1 Gold-Silver Ratio.
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Have you ever wondered is your Precious Metals stack big or small comparing to other people?
Do you have enough gold and silver? How much gold or silver you would have to own to be in top 1% of their owners in the world? In this article I will estimate how much gold and silver on average is held by people in 4 wealth brackets. Lets cover only investment gold and silver, in the form of coins and bars, without other objects. According to Knight Frank in Mid 2019 in the world there was:
BILLIONAIRES ~4 TONNES OF GOLD PER CAPITA The billionaire group collectively held $8 Trillion wealth. Assuming they have allocated 5% to gold, this means 0,4 Trillion USD. Or 8,000 tonnes of gold with $50M/tonne. Since there are about 2000 billionaires, each of them holds on average about 4 tonnes of gold. ULTRA HIGH NET WORTH INDIVIDUALS (>$30M) ~960 ounces GOLD PER CAPITA According to Knight Frank Wealth report UHNWIs on average had 3% of their wealth in PMs. Assuming the average wealth of UHWI is $50M, their total wealth is about 25 Trillion USD. This means they held PMs worth approx. 750 Billion USD. With price of $50M per metric tonne, this equals to 15,000 tonnes of gold bullion or 964 oz per UHNWI. If you happen to own anything around 900 oz of gold - congratulations! You are in the top 1% of top 1% , since UHNWIs represent 1/10,000 of all adults on the planet. DOLLAR MILLIONAIRES HOLD ON AVERAGE 10 oz of GOLD The millionaires group (50 million people) is estimated by Credit Suisse Wealth Report to be collectively worth $158 Trillion. Since two previous groups hold about 23,000 tonnes, There is more or less 18,000 tonnes left for the rest of humanity, since non-central banks investment reserves are about 41k tonnes. Lets estimate that millionaires own large chunk of it - 16k tonnes. That will mean, they have allocated only 0,5% to gold bullion, worth about 0,8 Trillion. 16k tonnes equals 514,000,000 oz. This means roughly 10 oz of gold per person on average. The millionaire group happens to be exactly 1% of global adults population. Since their 10 oz of gold is an average, it is likely that large % of that group owns anywhere between 3 oz to 300 oz. We can estimate that 3 ounces of gold puts you in top 1% of largest world gold owners! SILVER OWNERSHIP The silver bullion global ownership distribution is even more striking. How much silver you have to own to be in top 1% of its owners? It is estimated global silver bullion supply to be about 4 billion ounces. Out of which JP Morgan with few other large bullion banks own 1 billion ounces. If UHNWI population, each worth at least $30M owns on average 1,000 oz of silver.... that is just a single biggest bar - together they own 0.5 billion ounces. The millionaires group with 50 million people needs to own just 50 ounces of silver per person to grasp the remaining 2.5 billion oz. Since their 50 ounces is an average, their typical ownership most likely ranges from 20 to about 500 oz, or even wider. This indicates, that only 20 ounces of silver bullion puts you in top 1% of silver stackers!
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Why are cryptocurrencies much more popular in certain countries but much less in others? Is it related to Internet adoption, banking system, official gold reserves or corruption within a country? Let's find out what statistics can tell us. Chainanalysis recently published a study ranking countries according to "Global Crypto Adoption Index". The total score of this Index consists of 4 elements: 1) On-chain cryptocurrency value received, weighted by purchasing power parity (PPP) per capita 2) On-chain retail value transferred, weighted by PPP per capita, 3) Number of on-chain cryptocurrency deposits, weighted by number of internet users, 4) Peer-to-peer (P2P) crypto exchange trade volume, weighted by PPP per capita and number of internet users. 154 countries were ranked. Top 5 countries are:
I have selected 52 countries from this study - covering a bit above 6 billion people in total.16 countries have Crypto Adoption Index above 0.25, with average of 0.53. Thrirty-six countries have Crypto Adoptio Index below 0.25 with average 0.12. I propose that first we will look at the raw numbers and later try to find socio-economic causes behind observed correlations. For each of those 52 analyzed countries I have attached 4 statistics:
Here are three, key findings: 1) Group of (16) countries with highest Crypto Adoption Index have average Gold reserves per capita of only 2.12 grams VS 14.3 grams for (36) countries with lowest Crypto Adoption Index - about 7 times difference in gold reserves! 2) Median age in highest Crypto Adoption group is 30.99 years, while median age in lowest CAI countries is 37.17 years. 3) Corruption Index in highest Crypto Adoption countries is on average 38.18 (0 - most corrupt, 100 - no corruption). In lowest CAI countries Corruption Index is 59.08. This difference is huge, since Corruption Index range is from 16 (Venezuela) to 87 (New Zealand). When we look at correlation ratios, the picture is the following: Correlation Ratio between Crypto Adoption Index and - Median Age is minus 0.19 - Gold Reserves is minus 0.23 - Corruption Index is minus 0.42. We know that Cryptocurrencies are much more popular among young people than older people. My analysis confirms this, as countries in the first group have on avg 6 years younger population than in the 2nd group. Can greater adoption of cryptocurrencies be explained by much lower gold reserved held the country's central bank? Such country is likely to have weaker financial "culture" related to precious metals, as a result their population are more willing to use other forms of monetary exchange. Also, the less gold reserves a country has, the more likely it will be a subject of speculators attacks on currency - weaker currency forces people to seek alternatives, as we can see in the case of Venezuela. But there is yet another factor which explains both low gold reserves and excessive currency printing: corruption. Heavy corruption has a series of negative forces on economic life:
Cryptocurrencies, which do not lose value as fast as fiat currencies in heavily corrupt economies, can become popular. Interestingly, they are not the popular choice among countries with low corruption, since the relatively high standards of living in those countries do not push people to use alternative forms of exchange/store of value apart from their national currencies and precious metals. The perceived soundness of the banking system correlates the most strongly with how unpopular are cryptocurrencies in that country. I've taken data from World Economic Forum survey questioning “In your country, how do you assess the soundness of banks? The score can range from: 1 = extremely low—banks may require recapitalization; 7 = extremely high—banks are generally healthy with sound balance sheets. Correlation between how people view the soundness of their banks with cryptocurrencies adoption index is -0.52 within the following set of 38 countries: Ukraine, Russia, Venezuela, China, Kenya, USA, South Africa, Nigeria, Colombia, Vietnam, India, Thailand, Brazil, UK, Pakistan, Philippines, Australia, France, Canada, Netherlands, Argentina, Turkey, Ecuador, Indonesia, Germany, Chile, Spain, Poland, Sweden, Italy, Singapore, Austria, Finland, Greece, Switzerland, New Zealand, Egypt, Norway. This indicates that the lower trust in the banking system, the more use of cryptocurrencies. |