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Around the campfire: Big Brother Digital Currencies

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Like most of you, I presume, I strongly feel that how I use my money is my own business. I don’t see why anyone should be able track or control my use of money to gather data about me or my personal tastes, or to extend in any way their surveillance over me.

Not that I have anything to hide – it’s just that how I choose to use my money seems a deeply private affair. Which is one reason for using gold as money – gold is the most universal and private store of value there is, as it owes its creation to no human. Anything made by humans can be corrupted and abused.

So I am watching with some trepidation the onward march of Central Bank Digital Currencies (CBDCs). Pretty soon governments everywhere will try to foist these cash-substitutes onto their citizens.

Ironically, cryptocurrencies were created to escape the relentless devaluation of fiat currency (cash); yet governments are now going to use the technology underpinning cryptocurrencies – blockchain – to re-assert their power over how we use the money they create, by developing CBDCs.

The world’s central bankers are accelerating their efforts to coordinate and roll-out CBDCs; they are alarmed that China’s own CBDC will leave them standing.

China is often thought of leading the charge on CBDCs but actually the National Bank of Cambodia (NBC) last October launched a payment system called Bakong, co-developed with Soramitsu, a Japanese blockchain start-up. The NBC hopes that the Bakong will stem the decline in use of the national currency, the Riel. Most transactions in Cambodia are in US dollars and the Riel is losing its status as money.

More than a dozen countries are in the process of developing their own CBDC. The deputy governor of China’s central bank, the People’s Bank of China (PBoC), recently wrote in Yicai Global that China’s CBDC should be used on a “controllably anonymous” basis and that “complete third-party anonymity… may encourage criminal activities”. “Controllably anonymous” sounds like a contradiction in terms. India said earlier this year that it is considering criminalising private cryptocurrencies while building a framework for its own official digital Rupee.

China’s CBDC has already been steadily introduced via the state giving away millions of its currency, the Renminbi (which means “the people’s currency” in Mandarin) in a series of state-run lotteries in various cities. Users have to download an app to receive the currency.

In reality, China’s CBDC will be a “stablecoin”, i.e. pegged to the Renminbi. This, hopes Beijing, will prevent speculators from driving it higher or lower. It will also, hopes the Communist Party, knock privately-generated cryptocurrencies – trading of which is banned in China, even though an estimated 65% of global Bitcoin mining happens in China – for six.

 

 

Stablecoins have other advantages for governments, too. They are programmable; in early testing for instance the Renminbi version had an expiry date, encouraging holders to spend it more quickly. It was also trackable, allowing closer monitoring of Chinese citizens.

With such state control all kinds of things become possible – such as the immediate issuing and collecting of fines.

This kind of stuff gives me the creeps. So when I read (as I did this week) that a senior member of the Bank of Japan says that seven central banks – including the US Federal Reserve and the European Central Bank – are now jointly looking into setting a common framework for CBDCs, I sniffed Big Brother around the corner.

Money is power. But money and power are in a confusing flux right now. Privately-generated cryptocurrencies (which are extremely difficult to use as money) are facing a steady but relentless challenge by government stablecoins. And as governments everywhere try to push their digital cash on their citizens, the scope for government control over how, when, and where they can use that money will expand willy-nilly.

To avoid even the risk of that kind of supervision and interference I will be using my Glint card, and its gold, even more in the future.

Until next week!

Jason.

Gold – according to Dominic Frisby: How the Pound Sterling got its name

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Today we consider the coins of Anglo-Saxon Britain.

The winter of 406-7 was cold, very cold in Europe; the Rhine froze over. Hoards of Alans, Vandals, and Suebi made their way across and into the Roman empire, no doubt violent with hunger from the cold, and greedy for what they had admired for so long on the other side. But the devastation they wrought met with no effective response from Rome.

In Britain, Rome had already lost the north and west to warlords. The Roman armies in Britain, who had probably not been paid, now feared these Germanic tribes would next cross into Britain. So, led by Constantine III, who would declare himself Western Roman Emperor, they made their way across the Channel into Gaul, leaving ‘Britannia’ to fend for itself. We do not really know if it was Rome that gave up Britain, or Britain that gave up Rome, but, either way, the Dark Ages had well and truly begun.

Gold, silver and bronze coins had found widespread use under the Romans. They were used to pay taxes, and often re-minted to pay the army and the civil service. With Constantine’s departure, there was almost no new minting and very little importation of new coins. Judging by the numerous hoards found from the period, many buried their money – presumably to keep it safe in this unruly new environment of no military protection and merciless invasion from Angles, Saxons and other tribes from the continent. With the lack of new supply, existing coins were re-used. Clipping became widespread. The previously vigorous late Roman monetary system lay in tatters. Minting did not properly start up again for at least another 200 years.

The Anglo-Saxon invaders, at first, did not use gold coins so much as money but for decoration. King Eadbald of Kent was the first Anglo-Saxon to mint coins around AD 625 – small, gold coins called scillingas (shillings), modelled on coins from France. Numismatists now call them thrymsas.

As the century progressed, these coins grew increasingly pale, until there was very little gold in them at all. From about 675, small, thick, silver coins known as sceattas came into use in all the countries around the North Sea, and the gold shilling was superseded by the silver penning, or penny. Gold fell out of use almost altogether, though silver had something of a boom.

It’s thought the word ‘penny’, like the German ‘Pfennig’ might come from the pans into which the molten metal for making was poured. ‘Pfanne’ is the German for ‘pan’.

The Mercian king Offa – he of dyke fame – reigned for almost 40 years from 757 to 796. He must be seen as one of the greatest Anglo-Saxon kings, certainly the greatest of the 8th century. As well as his dyke, which protected his kingdom from Welsh invaders, he is credited for the widespread adoption of the silver penny and the pound as a unit of account. His coins, with portraits and intricate designs, were as accomplished as anywhere in Europe at the time.

His system, though probably imported from the Franks, for reasons which will become clear, almost certainly dates back to the Romans. 12 silver pence equalled a shilling. 20 shillings equalled a pound weight of silver. Thus 240 silver pennies, weighing about 1.4g each (sorry for mixing imperial and metric) was equivalent to one pound weight of silver. Thus was the pound a pound of sterling silver.

The Latin word for a ‘pound’ is libra and the pound sign, £, is a stylised writing of the letter L. The d meanwhile used for pence comes from the Latin denarius. Thus the roots of the system were almost certainly Roman.

Offa’s system remained standard until the 16th century and, in many ways, until decimalisation in 1971. You had to add up each unit of currency separately in this format: £3.9.4, which would be spoken “three pounds, nine shillings and four pence”, or “three-pounds, nine and four”. To add, you would calculate each unit separately, then convert pence to shilling, leaving leftover pence in the right column, then convert the shillings to pounds (with leftover shillings in the middle column), and then add up the total pounds.

Offa’s systems were gradually consolidated over the subsequent centuries, especially as the kingdoms of Anglo-Saxon Britain began to merge. In the 860s, for example, the kingdoms of Mercia and Wessex formed an alliance by which coinage of a common design could circulate through both of their lands.

The Viking invaders over this period found coinage systems far more sophisticated than their own and the Danegeld, with which they were bought off, was paid in silver pennies. I had always thought the “geld” in Danegeld meant “gold” but in fact it means yield, and the Viking invaders demanded this tribute wherever in Europe they ravaged.

The system was quite efficient – on both sides. For the invaders, they were often paid more than they could raise by looting, without having to fight. For the locals, the ravaging was avoided, although, as Rudyard Kipling noted in his poem on the subject, “if once you have paid him the Dane-geld, You never get rid of the Dane”.

The Danegeld probably also motivated improvements to Anglo-Saxon coinage. To pay his own soldiers, to build forts and ships and to pay Dangeld, Alfred the Great increased the number of mints to at least eight. His successor Athelstan had 30 and, to keep order, passed a law in 928 stating that England should have just one currency. Ever since there has been just one. This was many centuries before standardisation in France, Germany or Italy.

When William Duke of Normandy invaded England in 1066, he succeeded where his Viking ancestors had failed for 270 years: he managed to conquer England. It meant he could take control of English coinage, which was far superior to that which he possessed in his homeland. William’s coins struck back in Normandy are remarkable for how poor they are, compared to their English counterparts. He had at least seven types of English pennies struck with his name on. It meant he was able to achieve the rebranding that was so important to him. No longer was he William the Bastard, as he was then known. Now he was William the Conqueror. He let the world know through his coins. And that’s how we know him today.

* Dominic Frisby, author of Daylight Robbery – How Tax Shaped The Past And Will Change The Future, out now in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Soapbox: Fractional banking and gold

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If  you hold your gold physically, at home or in your office safe, you are obviously exposed to the risk of burglars stealing it. You’ll be able to take it out and fondle it, but it’s not entirely risk-free.

Maybe you choose to hold your gold in an ‘unallocated’ account. You may be surprised to learn that this unallocated gold, no doubt on deposit in a bullion bank vault, while probably safe from burglars, is not entirely risk-free either. Because when push comes to shove you don’t really own that gold.

That’s because it’s part of the ‘fractional reserve’ system, the system used by commercial banks across the world. Under fractional reserve banking only a fraction of the bank’s deposits are backed by actual cash on hand and immediately available for withdrawal. The clue is in the name. The same is true for that unallocated gold – if everyone who ‘holds’ that gold demanded its redemption there would not be enough to go round. Unallocated gold accounts are really just an exposure to the price of gold.

Proponents of fractional banking argue that such a system creates liquidity; it enables the increase of money and credit supply. Opponents assert that such a system is inherently risky, as it increases the supply of money beyond what actually exists in the bank.

For hundreds of years fractional reserve banking has resulted in bank failures as depositors lost their money because their bank could not immediately pay them the full amount they had on deposit. Anyone who has seen the 1946 movie It’s A Wonderful Life starring James Stewart can see what happens when confidence in fractional banking evaporates. Life falls apart; the difference with real life is that no angel (as in the movie) will come to our rescue. Fractional banking is a kind of Ponzi scheme, whereby fresh deposits are used by the bank to extend credit to new borrowers.

The fractional reserve system underlays the Great Financial Crash of 2007-09; thanks to it, banks such as Northern Rock (in the UK) and Bear Sterns (in the US) succumbed to irrational exuberance and lent excessively, far more than they had on deposit. In the US the fractional banking system enabled banks to give mortgage loans to ‘Ninjas’ – people with ‘no income, no job or assets’. At the height of the boom UK banks were offering so-called ‘suicide loans’ of up to 120% of the value of a house with only self-certification of income.

You would think that banks and regulators had learned some lessons from then. Yet on 26 March 2020 the US Federal Reserve announced it was reducing the reserve requirement ratio for US banks from 10% to 0% across all deposit tiers. The Covid-19 pandemic was used to justify this. There’s no indication that the US Fed is going to re-impose it’s (already light-touch) reserve requirement any time soon. In the UK, the minimum reserve requirement for banks is 12.5% and for ‘finance houses’ at least 10%.

Under a ‘full reserve’ system – whereby a bank would be required to hold sufficient reserves to pay all depositors their full deposit on demand – the inherent risk of that bank collapsing (and the further risk of a systemic meltdown) would disappear. Proponents of a full reserve banking system argue that because it would separate money creation from bank lending, greater economic stability would result – although bankers would no doubt protest at their reduced bonuses, which would happen if they were unable to lend so freely.

What’s this got to do with gold?

Unallocated gold accounts do not physically store ‘your’ gold; they use the gold for other investments or loans, and promise to re-pay you the gold on demand. Unallocated gold accounts are within the fractional reserve system in other words. Unallocated gold is only credited to the investor – the bank or dealer remains the owner. If the gold holder of your unallocated gold goes bust, all you will be left with is a promise that you will get your gold or money back – but you will have to wait in line along with other angry creditors and may eventually lose what you thought you owned.

What about gold held in paper form, in an exchange-traded fund (ETF)? That too is not free of risk. It is standard practice for Authorized Participants, such as banks and brokerage houses, to contribute baskets of purchased or borrowed assets to ETFs; the bullion therein may be borrowed. In the event of a 2008-style financial crisis, the lending institutions would have first claim to the gold when borrowed, leaving shareholders in a precarious position.

Even trying to buy physical gold can run into difficulty. The august Royal Mint in the UK has been swamped recently by customers who have placed orders for gold and silver coins which the Mint has been unable to deliver because the paid-for items are out of stock.

Glint’s allocated gold

If you own gold through Glint you genuinely own it – it’s allocated to you and the gold is held in allocated storage under a custody agreement. Banks or financial institutions cannot lease out those bars, because they can’t access the allocated bullion. Moreover if you buy gold through Glint you have certainty that the price you pay is for the actual amount of gold you want.

And you avoid the inherent risks associated with fractional banking – and burglars. Moreover, unlike physical bullion or unallocated gold, with the gold that you own through Glint, you can also use it for transactions in your daily life, from buying a coffee to a family holiday; online and in-store.

Gold: it’s the season for buying

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It’s been a stellar year for gold so far, and the way things are shaping up 2019 is but a precursor to the major event ahead. In any terms, whether the US dollar, the pound Sterling, or the Chinese Renminbi, gold has significantly risen. There has been a change in sentiment towards gold, driven by fundamentals in the market that are not going away easily or soon. As a result, you are seeing gold do what it is supposed to do in situations that we are seeing unfold around the world. The real tilt in gold’s story is that there has been a shift in its narrative. For years it has been ignored by the investment community, as many were put off by its non-yield paying tendencies, but now we have an explosion in negative yielding debt. With negative yields set to be here for some time, we believe the story of gold has moved into a positive regime. As well as that inflation in the US looks as though it is starting to get a grip, as the chart shows.

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Along with a significant shift in the backdrop surrounding gold, we are now in a good seasonal spot. Seasonality plays a major role the gold market, which is now entering a positive period. Demand for gold should ramp up with Diwali (in India) kicking off the festive period in November. During this period, gold is given as a gift and therefore there tends to be a significant jump in demand. Following on from Diwali, we will quickly move into Christmas and then the Chinese New Year. As India and China continue to expand and wealth grows within both countries, demand for gold is set to become more pronounced, especially given that people within these nations will be aware of how depressed the long-term price of gold really is. With a natural increase in demand for gold, prices will be pushed higher over the coming months.

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Gold’s Purchasing Power

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Most people have heard the saying that an ounce of gold bought a nice ‘toga’ in the hey days of the Roman Empire and still buys a comparable suit in modern times, as proof that gold has enduring purchasing power.

Despite what we have observed in the last 100 years, inflation has been generally low in peacetime and the money supply has grown gradually as populations have increased and the actual price of gold has had long periods of stability, mostly set by the powers that be. Sir Isaac Newton, as master of the U.K. Mint, set the gold price at £3.17s.10d per troy ounce in 1717 and it effectively remained the same for two hundred years, with the exception of the Napoleonic wars from 1797 to 1821.

In the US, the gold price was set officially from 1792 to 1971. Starting at $19.75/ounce, it was raised to $20.67 in 1834 and $35 in 1934. Since 1971, gold has floated freely in the global market place.

The ‘modern’ days of inflation began in 1914, with the outbreak of the first global war. The need for debt aided by increasingly growing money supply has been with us ever since. A basket of goods priced at 100 in 1914 has seen its price rise 25 times since then to near equivalent 2500.

If we use the same yearly inflation numbers in reverse, we can show that the value of money has lost 96% of its value since that time.

In order to see the changing purchasing power of gold, we can compare the ability for an ounce of gold to buy the changing value basket over the last century. With gold fixed from 1914 at $20.67/oz, you can see the falling purchasing power of gold until the sharp jump when gold is re-valued in 1935 to $35/ ounce and then it falls again as the yearly basket increases in price with a fixed gold price. The next large jump in purchasing power happens when the dollar comes off the gold standard in 1971 and the floats freely.

It is easy to understand how the purchasing power of gold would drop with a fixed gold price but clearly there was a long period between the incredible highs of 1980 and the lows of the ‘Brown bottom’ before gold turned up strongly. While these swings will be much muted in other currencies, we must accept that although gold’s high in 1980 was an outlier, gold has doubled in purchasing power since the outbreak of the first world war. Maintain your purchasing power by having your savings on the Glint platform.

4.1%

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The average 30-yr prime mortgage rate in the US currently.