When it comes to Currencies: Who Is “The Best Looking Leper in the Colony?”

I have taken the title of this week’s blog from a great article by Henry Hewitt. All credit to Mr Hewitt for this great line.  Although his article is primarily looking at the significance of the international oil price, it touches on some great one liners about Gold and paper currencies.  I have lived in a world of exploring the history of Fiat currencies for a number of years now, versus the history of Physical Gold and Silver.  As many of you already know, “Fiat” is Latin for “let there be”, a man-made copying of the ancient Hebrew phrase in the Genesis account of creation. This means man wanted to create something (man-made money), so he spoke it out of his imagination. Regardless of our theological position, whenever man gets above himself and thinks he’s a god, it doesn’t bode well.

And so, I love the accuracy of this line by Hewitt.  Fiat currencies, from the moment of their man-made creation, are in decay, if you will, unless they are pegged to the real historical and ancient form of money, Gold and Silver.  This is because Gold and Silver, like air and water, are found in the earth and are part of a limited natural supply in our earth’s crust.  It’s a physical thing, not an idea that can evaporate.

But, when did paper currencies come along?  When reading many online blogs, it often seems that they came along after the unpegging of “money” from the Gold Standard in 1933.  Well, interestingly, it was the Chinese who actually invented “paper money” over 1400 years ago!  “Paper bills were first used by the Chinese, who started carrying folding money during the Tang Dynasty (A.D. 618-907) — mostly in the form of privately issued bills of credit or exchange notes — and used it for more than 500 years before the practice began to catch on in Europe in the 17th century. While it took another century or two for paper money to spread to the rest of the world, China was already going through a fairly advanced financial crisis: the production of paper notes had grown until their value plummeted, prompting inflation to soar. As a result, China eliminated paper money entirely in 1455 and wouldn’t adopt it again for several hundred years. Another not-so-well-known fact: the word cash was originally used to describe the type of round bronze coins with square holes commonly used in the Tang Dynasty, called kai-yuans.” (Time Magazine)  

So, I think it’s probably clear to say that the danger of paper money has been in the Chinese psyche far longer than us British and Westerners. Maybe the Chinese learnt the “paper money” lesson earlier than the rest of the globe, because China is also, interestingly, going to be a fairly frequent word in this week’s article.

But first, here is Henry Hewitt’s quote in its original context, as this week we explore the currency war of fiat currencies and the only safe place, economically speaking, to run: “The temporary rise in the dollar against most other currencies is partly the result of being the best looking leper in the colony. Furthermore, an expected rise in dollar rates makes the currency seem relatively more attractive, though this is a double-edged sword. It should be clear now that the reserve currency status is neither a birthright nor a privilege that stays forever in one place, which means it isn’t a question of if China will replace the U.S. as title holder but when.” There’s that red coloured word again, ‘China’. Back in April of this year I wrote a piece called, ‘China and Alan Greenspan – Something Big is Coming‘; then in June I wrote a piece on the increasing signs of a currency war between the Chinese Yuan and the U.S. Dollar called, ‘China & Gold: Challenging the Dollar on Land & Sea.‘  This is because China has been in the background, preparing for a currency war, for many years, but recently, throughout 2015 in particular, we have seen increased signs of that ‘war’ coming out into the open.  Please see these two previous blogs for more specific information on these signs.
“The $64 trillion question now facing the current world’s economic superpowers, by which I mean the U.S. and China, is not whether the Fed will raise rates any time soon, but when will the Yuan replace the Greenback as the world’s reserve currency? Whether or not paper money turns to dust generally is a separate question. The U.S. is now the world’s leading debtor nation, owing something on the order of $18 trillion. This is by far the most money that has ever been owed at any time in history. Does anyone really believe that it will ever be paid back?  Inflation (printing money) and default are the usual suspects, but the unwinding of American debt will not necessarily happen in an orderly fashion.  It has been a constant throughout history that both the Operations & Maintenance (O&M) and capital costs of running an empire at some point exceed the benefits or gains obtained from having that empire. Prestige does not pay the bills. Hadrian’s Wall, a high-water mark of Roman expansion, is in a pretty bad state (like a lot of American bridges that are crumbling on the home front).” OilPrice.com

 
To continue in reference to Hewitt, he comes up with a brilliant allegory with the wizard of Oz, of which I had not realised before: “Gold isn’t doing much to suggest that paper money is on the ropes but you may still be forgiven for thinking gold is a crouching tiger and it is only a matter of time. Oz is the abbreviation for an ounce of gold – “Follow the yellow brick road”; that is the path of hard money.”  The ‘Man’ behind the curtain is now a woman (He is referring to Janet L. Yellen who took office as Chair of the Board of Governors of the Federal Reserve System on February 3, 2014 for a four-year term). But the power of the Fed is not in doubt; it still illuminates the Emerald City and all who look to it for guidance and more free money, which can be printed instantaneously and in any amount. At some point, the value of ‘free money’ will fall out of the sky, like Dorothy’s house onto the ruby slippers. Are we anywhere near that point? On September 17, the mighty Fed decided to do nothing (he is referring to the FED’s decision last week not to rise U.S. interest rates), continuing a 9-year inning without a rate increase. Did the markets breathe a sigh of relief? On the first full day of trading after the announcement the S&P fell by 1.6 percent and the Dow Industrials fell nearly 300 points; so, no, they didn’t.” (ZeroHedge)
 

Follow the yellow brick road to Precious Metals

Again, I enjoyed this allegory.  But here’s what the author of the above missed. In the original ‘Wonderful Wizard of Oz’ from the 1900 book by L.Frank Baum, the slippers Dorthy wore, to help her find her way to the city of Oz, were Silver slippers, not ruby ones.  They were only changed by Hollywood, to increase the dramatic effect of the new technicolour filming. But in the original book, “the Silver Shoes will only pass to a new owner if they have physically defeated the previous owner, or the previous owner willingly hands them over.” In the book, there is a great deal of fighting over who owns the silver (slippers) while the only path to “breaking the illusion of who is in control” is on the golden brick road.  Just for the record, I believe in following hard facts about economies but the literary allegory is interesting all the same.
 
What is often a helpful exercise, in keeping track of the validity of some commentators – in that it exposes a track record of accuracy – is looking back at commentators over the past year or so, to see how accurate they were in retrospect. Back in June 2015 James Rickards gave an interview with Kitco News and here are some of his comments. For the full interview please click on the video link below:
 
 

 
“Where is the Gold Market, is it in London or is it in China?  China is seeking to create a Chinese Gold Price Fix.  The old saying, “Follow the money”, well, “Follow the Gold.” The Gold is going to China, so yes, China is trying to set up a rival to the London Gold Fix. But at the same time, China are playing nice and they have just joined the London Gold Fix, they are one of the financial institutions, so they have a foot in both camps. I think the F.E.D. will not be able to raise rates until 2016 and I said that in 2014. Here we are in almost July 2015 and I’m sticking with that forecast.  Maybe even not until 2017. That means a weaker dollar, which means stronger gold.” James Rickards, quote from video: How Could Yuan Reserve Currency Status Affect Gold? for Kitco News” 
 
He was right. Both on the F.E.D. not raising interest rates and on the reason: China’s currency war with the U.S. Dollar. He clearly centres the entire discussion around the real “currency” which is Gold (and Silver.) 
 

So, where is the safe place to run from fiat currencies, financially speaking?  As we at Bleyer have been saying for a few years, there is no where to go within the fiat system itself, once a currency is devalued through repeated quantitative easing, and low interest rates.  Many economic commentators agree: “Central Planners have not yet figured out a way to end the problem without a liquidation event; the problems of 2008 were not allowed to run their course. In other words, there is no precedent for a rate recovery from such an enduring trend without first undergoing a massive deflation. What is different this time is that gold is no longer seen as an official backstop, though central banks still own plenty of it (for some reason). As terrifying as deflation is, hyper-inflation is worse. Consider what happened in France after 1790 and Germany after 1923.” (ZeroHedge)

 
So, I’ll let both a mix of historical fact and international language give the answer. This is because the fiat currency system is a recent global creation, so to look at the solution, I think it’s wise to go back to see what international history tells me.  Here is a language and historical insight into the alternative to fiat currencies:
 

  • The word ‘cashier’ in the Cantonese dialect of China, literally means the person collecting silver. 
  • The word for ‘Silver’ and ‘Money’ is the same in 14 languages, some of which are ancient languages and therefore carry more weight to historical value of Silver over centuries. These include:  French (argent) and Hebrew (kesef). 
  • Also, thanks to the online banter of the international world of the internet, I take it on friendly trust that these further include: Welsh (Arian), Italian (Argento), German (Silber), Gaelic (Airgead), Thai (Ngein) and Swahili (Fedha), which sounds like someone is also laughing at the concept of the Federal Reserve at the same time as saying ‘Silver!’
  • In Portuguese, the slang for cash is ‘Prata’ which means ‘Silver.’ 
  • In old Russian fairy tales the word ‘Serebro’ is used to describe both ‘silver’ and ‘money.’
  • I have it on good authority that in Chinese writing the word for ‘bank’ is written as ‘silver exchange.’
  • Lastly, silver in Vulcan is ‘Haul-tukh’
  • If I have received any of the above information incorrectly, then I look forward to our international readers happily correcting any of the above information.
     

So, where does this leave us in Britain?  Well, we always enjoy receiving feedback on our blogs from you. You are the reason we write; to inform and to encourage our clients and readers to research and keep alert.  This week, one of our favourite feedback emails was from Joe from Sainsbury’s Bank Money Matters Blog.  And he sent us a really clear info-graphic about the History of the Great British Pound. By now, it will probably come as no surprise to you, that our GBP originated in Silver. That is from where the term ‘Pounds Sterling’ originates.  “The British Pound is the oldest currency in use today. Originally forged from pure silver, it has a fascinating history.  It is the 4th most traded currency.”

As proud as I am of the Great British Pound, and historically all that made Great Britain ‘great’, I do have to keep my logical brain in gear, even with my patriotic sentiments. Forbes writer Michael Pento, wrote a classic piece four years ago now, and it is truer today than it was then. It is simply entitled, ‘Gold is the True Reserve Currency.’ Fortunately, I believe, we in Britain are in a safer position, economically and politically, than the States. But our GBP is still linked to global fiat currencies, and is one itself. So I would still strongly recommend holding some of our portfolios in Gold and Silver, plus keeping cash flexible (i.e.: don’t tie it into long term investments from which it is hard to extricate oneself quickly, and to get of debt, as much as is possible.)
 
The U.S.’s inability to raise interest rates, makes clearing a mortgage less painful for longer. The longer those rates are held down the more the great British public can clear debts off, as interest accumulations are lower.  But on a macro-economic level, the lack of a rate rise just increased global financial instability. One of my favourite commentators for years, because he can make highly technical information on GoldSilver and currencies worthy of an occasional chuckle, is Franklin Sanders of The Money Changer.  
 
Yesterday he agreed, saying, “Why yesterday (Monday) the NGM and the Wall Street pimps (NGM is his long standing abbreviation for “Nice Government Men!”) did a great job pushing the Dow up 125.61 with talk about how the Fed would raise rates after all, later in the year, when anybody with half an eyeball and a quarter of a brain knows the Fed lost all credibility last week when it blinked and did not raise interest rates.  Listen now, and hear me, mark down my words and see: stocks peaked in May and will lose as much or more by October’s end than they have lost already. Sell your stocks. Of course, those of you with fat stock portfolios will say, “He is a bug-eyed looney” but you will be no different from every poor vainglorious soul since the Babylonian Wheat Exchange who has confused a bull market with investing genius. Sell now. In a bear market, money returns to its rightful owner. Here’s a question to ask yourself and your spouse: If the stock market is crashing and the US government closes the banks, would you rather have nice safe FDIC insured bank deposits, or silver in your hand?”

 
To follow this week’s literary and linguistic theme, Mr Sanders has written daily for years and always ends his commentary with the phrase “Aurum et argentum comparenda sunt,” which is Latin for “Gold and silver must be bought.”

 
Please do browse our Gold and Silver Coins and Bars, and take a regular look at our Special Offers page. We at Bleyer have believed in Gold and Silver educuaton for years and are here to help. We do offer an online basket if you choose or if you need to shop outside of regular office hours.  But we also understand the importance of being able to speak with someone to ask questions and find the way through the different product choices available to you. We are happy to spend the time you need in conversation, with no obligation to buy. Many of our clients come back time and again, precisely because we offer a high level of client care and bespoke orders, to suit your budget and financial planning.
 
We believe Physical Gold and Silver continue to be “on sale” at the current time, in this elongated phase in the currency cycle.  If the interest rates are kept low, we believe it is an increased opportunity to buy into Physical Gold and Silver.  The demand for Physical Gold and Silver is higher behind the scenes than the current fix price suggest and we advise all our readers to research the large disparity between those two values. The figures, and history, speak for themselves.