By Cesar Zambrano at ForexFraud.com

This article covers how gold can be held and traded using digital gold currencies and some of the problems that have arisen.

In addition to now being able to trade gold in a forex account held with an online forex broker, many individuals have traditionally used physical gold as a medium with which to store wealth. This has arisen due to the precious metal’s incorruptibility, its ready convertibility into other paper currencies, and its ability to hold value under inflationary scenarios.

Furthermore, the precious metal also enjoys the status of a safe haven currency since it retains value under extreme disaster scenarios such as wars, economic meltdowns and severe natural disasters.

Gold is also one of the few metals, along with palladium, silver and platinum, to have a currency code due to its long-established status as a hard currency of true intrinsic value. The internationally recognized three letter currency code for Gold under the ISO 4217 convention is XAU.

What are Digital Gold Currencies?

In the modern era of online money transfer transactions, gold can now be traded, transferred and held in accounts as a “Digital Gold Currency” or DGC. As such, it trades independent of exchange rates, although DGC deposits do fluctuate in value depending on the price of gold in your base currency.

Also, the issuers of such digital currencies generally guarantee that these e-contracts are fully redeemable into physical gold. Since they are not governments, such issuers take considerable measures to assure clients that they are legitimate companies and do in fact have the physical gold they claim to be keeping for their customers.

GoldMoney – an Active Digital Gold Currency

One of the more popular and currently active gold DGC contracts is GoldMoney, which was founded by James Turk in 2001. The company continues to operate and assures its DGC clients that the gold to back this DGC is insured by the reputable Lloyds of London insurance market and that it sits in vaults in England, Switzerland and Hong Kong.

Furthermore, movements of the gold that GoldMoney uses to back its DCG are verified and authorized by the Euro-Dutch Trust Company. Gold stores are also independently audited by Deloitte and Touche LLP on a regular basis.

The E-Gold Digital Gold Currency Case

E-gold was one of the more popular DGC’s and was founded in 1996 by Douglas Jackson and Barry Downey. Unfortunately, the DGC market was recently traumatized by the United States Department of Justice’s 2007 indictment of the issuers of the e-gold DGC for conspiracy to violate money laundering rules. These men were eventually given small fines and community service sentences for their apparently unintentional part in the suspected money laundering activities.

This case affected the owners of millions of e-gold accounts which were then required to provide identification information before making any subsequent transactions. In addition, their accounts were effectively suspended from being used for spending transactions in November of 2009 pending the organization meeting certain licensing requirements.

Despite the legal action, the e-gold company continues to operate and claims on its website that it will protect its clients’ precious metal accounts if they provide the required identification details that include a government-issued ID. Nevertheless, as of this writing, the company has suspended taking new accounts and is not allowing non-identifying customers to withdraw their balances or spend funds in their accounts.

Peter Schiff’s case centers around the print and spend mentality of the United States, and also Europe as they stave off bankruptcy of member countries. Saving and production, he says, will have to be done by somebody other than China eventually. The Chinese simply cannot prop up America and Europe forever as the chief global lender. Schiff also looks for a 1:1 relationship between the Dow and gold, as was hit in 1980 and 1929. With Europe’s stance of printing as many euros as necessary to prevent default of member nations, he says he may have to up his prediction to $10,000/oz. Either way, Schiff says to look for gold and the Dow to converge.

Another reason to be bullish on gold is that Central Banks are upping their reserves. In 2009, central banks were net buyers of gold for the first time since 1997. As currency (see USD and euro) becomes a less desirable reserve asset, gold looks shinier and shinier. It isn’t tied to government monetary and fiscal policy across the globe, and it has tangible value.

Russia has increased their gold reserves by 26.6 metric tonnes in the first quarter 2010, or about $1.2 billion at today’s price, according to World Gold Council data. Russia added 117.63 tonnes in 2009.

Kazakhstan bought 3.1 tonnes, or $137 million, of the precious metal in the first quarter.

The Philippines acquired 9.6 tonnes, or about $424 million, of gold this year.

India increased its reserves by 55% last November in a purchase from the International Monetary Fund, or 200 tonnes.

And then there’s China. It should come to little surprise that China is a stealth buyer of gold. Like Russia, they purchase the precious metal from their own mines, and don’t always report their reserve levels. The largest producer of the metal reported in April 2009 that it had increased it’s reserves by 76% since 2003, or 454 tonnes. Given their exposure to US Treasuries, this seems like a shrewd move.

The gold rushes by central banks probably signal more than just diversification and emotions. There might be some sound thinking here.

We’ve hit many nominal all-time highs for gold as of late, the most recent being today at $1,258.30/oz, which beat yesterday’s record closing high of $1,248.20. Keep in mind, though, once adjusted for inflation, the all-time high was set January 21, 1980 at $2,163.62/oz, in 2009 dollars. Sure enough, if you do the Peter Schiff math, this was the 1980 1:1 relationship with the Dow he speaks of (in nominal terms). Each converged around $825.00. In other words, we’re hitting nominal highs, but we’re not in unprecedented territory.

Whatever your feeling about gold, it’s performance stacks up favorably next to almost any asset. The following 5-year spot price chart beats stocks, real estate, and seems steadier moving forward given its reactionary logic to government policy.

Source: BullionVault.com

If you had moved your portfolio into gold in March 2008, upon the collapse of Bear Stearns, you would have enjoyed about a 28% gain during this financial crisis, recession, and economic turmoil. I choose this entry point not because it is an ideal price floor, it isn’t. Only because if you were completely clueless about the state of global finance and fiscal and monetary policy up to that point, you could have woken up then, and moved at least a portion of your assets into gold. For the last 5 years, the average annual return on gold is about 37%. As far as buy and holds are concerned, that’s a nice 5-year run.

Obama did his best Bush impression the other day talking about healthcare. See if you notice anything odd about his math:

Well damn, if employers would be paid 2900% of your current insurance premium. If those numbers are correct, well gee, they probably could give me a raise. I might have to change my mind on healthcare reform.

Of course, Obama shouldn’t feel too bad, it’s not like Bush didn’t do this all the time. Harry Reid said losing 36,000 jobs was good. Or take our space cadet, speaker of the house Nancy Pelosi, who claimed unemployment would skyrocket to somewhere around 167% if the stimulus package wasn’t passed:

Fed Pledges to Keep Rates Low For Foreseeable Future

According to Bloomberg, Ben Bernanke and the Federal Reserve have pledged “to keep the main interest rate near zero for an “extended period” and confirmed that emergency measures to prop up the housing market will end as planned this month.”

With the first time homeowner credit set to end soon, it will be interesting to see if low interest rates will keep the housing market from collapsing even further. It will also be interesting to see what effects such a policy will have on inflation.

Gold Rush?

Speaking of inflation, while it certainly hasn’t set in yet, gold prices have been steadily creeping up. It currently stands at $1124.30 an ounce. This could be a sign of things to come.

Jeff Clark pointed out at LewRockwell.com that both the Reserve Bank of India and China have hinted at having interest in buying the next batch of gold to be sold by the IMF (about 191.3 tons). The last time India bought 200 tons of gold, prices went up 14.2% in 4 weeks. Is demand increasing for hedges against inflation?

The End of ‘Too Big to Fail’… Hopefully, but Probably Not

Is Chris Dodd actually doing something right? I know, it doesn’t seem possible given his track record. But Dodd has put a plan together to unwind the infamous ‘too big to fail doctrine’ that created the moral hazard that helped bring on this financial crisis in the first place. Conservative financial commentator, Larry Kudlow, actually gives Dodd some credit, explaining that:

“…under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called ‘funeral plans.’”

Unfortunately, the plan has loopholes. Kudlow continues, “It is possible that a government-resolution process could keep big banks alive or in conservatorship, such as with Fannie and Freddie.” In fact, Fannie and Freddie aren’t even mentioned (two more big contributors to the financial crisis) and it also gives a lot of power to the Consumer Financial Protection Agency. Oh goodie, another government bureaucracy to save us all (note sarcasm).

But Kudlow concludes that at least “…with the Dodd plan, the possibility remains that a true bankruptcy process will replace government bailouts.” Well I guess that’s at least possibly an improvement.

It’s no secret that spending is down these days. And while I think it’s about time that American citizens actually start saving money, it undoubtedly hurts businesses when consumer spending tanks.

One of the reasons consumer spending is down, other than an increased propensity to save, is simply that during the mortgage meltdown, massive amounts of money disappeared as housing equity morphed into devalued foreclosure sales. The Federal Reserve and Treasury have responded by pumping an ungodly amount of money back into the economy, which raises serious concerns about future inflation. But for now, much of that money is stuck in the banks and velocity is extremely low. Thus, businesses are still hurting for sales.

So what have some city governments and businesses done to combat this? Well, they’ve decided to print their own money. MSN Money highlights one such example:

“Last year, two Detroit tavern owners were sitting at the bar, sampling their beverages and bemoaning the local economy — no one in the city had cash, and when they did, they spent it in the suburbs. Then the pair hit on a solution: Print their own money.

“It is, after all, perfectly legal for anyone to issue currency, as long as it doesn’t look too much like a U.S. dollar. Thus was born the Detroit Cheer, a local scrip accepted by a handful of city businesses, including a pizzeria, an electrician and a doggy day care center.”

Indeed, this money appears to act more as a coupon which is accepted by a handful of businesses. However, in some cases these currencies have really taken off, such as “The western Massachusetts berkshare [which] is accepted by an estimated 400 businesses and has circulated to the tune of $2.5 million.”

In the end however, most of these currencies fail. Sociologist Ed Collum’s study of 82 of these currencies showed the survival rate to be only 20%.  It is, however, interesting to see how currencies can formulate from the ground up instead of the top down. It also makes one wonder whether people should be able to use gold or silver or something else like that as a competing currency. That is, after all, what is written in our constitution.

It is the season of giving; a wonderfully inefficient time of year

The spirit of the season is upon us. With Black Friday and Cyber Monday at our backs, rounding out those holiday wish lists for loved ones will consume the collective American conscious. With all of these efforts brought about by the desire to bring a smile to someone’s face, the wonder and awe of the Christmas season is truly something to be thankful for. But as chestnuts are roasting on my open fire, peppermint snow mocha’s cease to leave my hand and mistletoe is strategically placed around my home, I would be remiss if I failed to do the right thing: confront the deadweight loss of Christmas.

When I think of elves working away in Santa’s workshop, I imagine a cohesive unit; I see groups of assembly lines; I see efficiency. How else could they fulfill every child’s wish list who manages to successfully evade the naughty list? It is a Herculean task which requires razor sharp focus, fail-proof systems and an efficient allocation of resources. OK, now that I’ve robbed Christmas of its emotions and sufficiently desensitized you, let me suggest that our gift-giving practices are all wrong.

The graveyard shift in Santa's workshop

In short, people of this ilk begin presumptuously assuming they know what their loved ones want for Christmas, more than the loved ones themselves. Big mistake. As a result, people become the proud new owners of belongings they value far less than the gift-giver paid for them. In many cases, the receiver of the gifts value their new property at $0, or negative dollars, as they are forced to pretend they’re happily surprised, or actually have to use the present occasionally out of some social custom of appreciation. I know it felt that way with the blanket cape. I mean for Santa’s sake, I was 17.

This dilemma is the deadweight loss of Christmas. People are consuming goods and services who experience greater marginal cost than marginal benefit. In other words, there are people in the world that value those goods and services much higher than they do, and they are the ones who should end up with them. Joel Waldfogel’s book, Scroogenomics, claims that in 2007, Americans spent $66 billion on gifts. The recipients of those gifts only valued them at $54 billion, producing $12 billion less holiday cheer. And for regular readers of SwiftEconomics.com who still haven’t been swayed that a consumption-based economy is less than ideal, no, the Christmas stimulus is not the giant economic boost you think it is. In the 2007 data cited above, not only did people experience $12 billion less satisfaction, $12 billion was subtracted from the economy’s store of value. That is, the money the commodities cost would have been valued greater than owning the commodity itself. And unfortunately, most Christmas gifts are not appreciating assets capable of storing value. Wait a second, I suppose in the case of the US dollar, neither can it. (1)

Regardless, there is a simple solution to this Yuletide calamity: give cash. Shoot, to be more specific, maybe give the Chinese yuan, or a precious metal of your choice. It may not offer the same sentimentality of a well thought out present, or the same feel-good story of struggling through crowds to multiple retail outlets, but, there would be no deadweight loss. The economy would clip along at elf-like efficiency and presents would take longer to be thrown away or donated to a thrift store.

Intuitively, we understand the deadweight loss of Christmas. Quasi-cash, or gift cards, have grown in popularity. Between 1998 and 2005, gift card sales increased 27 percent a year. Estimates say quasi-cash make up one-third of Christmas spending. (1) Have people in your life been asking for gift cards at the top of their lists?

Christmas cash: a treat for anyone's taste

If you’re going to go gift card, go all the way. Gift cards are simply not as good as cash. They are lost, forgotten or otherwise never redeemed. Gift card recipients are no longer able to change their minds and spend the money elsewhere. As unbelievable as it is in these technologically advanced times, most banks still will not allow you to deposit your Macy’s gift card, in case you get a wild hair to save. Besides, billions of dollars in gift cards expire every year, a tenth of gift cards’ aggregate value. (1) The economy’s store of value and maximization of holiday cheer suffer yet again.

In conclusion, listen to St. Nick and his faithful crack staff of elves. Give people exactly what they want. If you don’t know, ask. If you want it to be a surprise, surprise them with cash. This holiday season, may the Rolling Stones be silenced. We all can get what we want.

_____________________________________________________________________________

(1) Scroogenomics – Townhall.com, retrieved December 2nd, 2009, http://townhall.com/columnists/GeorgeWill/2009/11/26/scroogenomics

Mobile computing machine...AND currency hedge. Think about it.

“From the mid-14th century until now, you can draw a relative straight line in the purchasing power of gold, and every central banker in their heart knows that. Gold is universally recognized as a store of value. That’s important because it denotes price stability.”

While fiat currencies come and go, gold was the standard currency used for international trade for centuries. Despite price fluctuations of gold, its purchasing power has pretty much remained the same; and a currency is only as good as its ability to buy goods and services.

Source: CNNMoney.com

All of the heralded economists we look to for answers, predicted October unemployment would be 9.9%. (1) As we warn here on a regular basis at SwiftEconomics.com, always be weary of an economist’s prediction.

The Labor Department reported that the unemployment rate hike was driven by formerly self-employed people no longer using that designation, as well as additional teenagers out of work. (1)

We know, though, that companies like Microsoft and Johnson & Johnson are not finished trimming their workforces. Microsoft announced a layoff of 5,000 employees earlier this year, with another recent announcement to fire 800 more, showing a great deal of confidence in Windows 7. Johnson & Johnson announced two days ago it will cut 7,000 employees worldwide.

The data confirms a SwiftEconomics.com call that the real GDP recovery in the third quarter is a product of companies cutting costs, not increasing revenues. Real GDP increased an estimated 3.5% last quarter, ending a slide of 4 consecutive contracting quarters. Firms have been adjusting to the economic climate, shedding jobs and cutting the fat in their businesses. An expanding economy would be creating jobs, and that is simply not happening. (2)

Source: BigCharts.com

____________________________________________________________

(1) Unemployment hits 10.2% – CNNMoney.com, retrieved November 6th, 2009, http://money.cnn.com/2009/11/06/news/economy/jobs_october/index.htm?postversion=2009110611

(2) Bureau of Economic Analysis News Release – BEA.gov, retrieved November 6th, 2009, http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp3q09_adv.pdf

(3) Gold breaks $1,100 – CNNMoney.com, retrieved November 6th, 2009, http://money.cnn.com/2009/11/06/markets/gold/index.htm

Meet my new financial planner, Martin. He's a commodity trader.

While gold is a hedge against inflation fears, U.S. consumer prices will likely fall this year, with some estimates coming in at a 0.5% drop. Any decline would be the first in five decades. (1) Nevertheless, massive deficit spending, the Federal Reserve keeping interest rates near zero and major increases in the money supply have investors worried, and why shouldn’t they be? The 1960′s saw debt financing of Vietnam, the moon mission and the Great Society; a recipe for major stagflation in the 1970′s. The 1990′s and 2000′s have produced huge war financing and U.S. presence abroad, social engineering deficit spending, bailouts and an unprecedented increase in the money supply. Bullion is headed for a ninth straight annual gain, after increasing 18 percent this year. (1)

Before you buy the jobless recovery pitch from our financial leaders, think about buying bullion instead.

In additional news, oil-exporting countries and big energy consumers such as China, Russia, Japan and France, are having a pow-wow to discuss the end of dollar-denominated crude oil. Translation: they don’t want to buy oil in a highly, or hyper, inflated currency; instead hoping for oil transactions denominated in a basket of currencies. This is an obvious hedge against U.S. monetary and fiscal policy, the same fears investors have when buying gold.

Yes, gold markets can experience speculative manias like any other. But gold is more of a reactive marketplace, countering punches from monetary policy (which fund fiscal policy). Plus, it’s a commodity, unlike the vacant mini-mansions still sitting from the housing/money bubble.

_______________________________________________________________

(1) Gold at Record Shows Investors Split With Banks Over Inflation – 2009, Bloomberg.com, retrieved October 6, 2009,

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXYAcH3JiSo0

“U.S. companies axed 532,000 jobs last month, though this was fewer than the revised 545,000 jobs lost in April, according to the ADP National Employment Report.”

Oh good deal, that’s a 2.4% improvement. So if we can keep that rate steady of improvement month by month, the U.S. will only lose some 11 million jobs before we begin to gain jobs again sometime around August 2012. Not too shabby. It would certainly be better than the 500 million jobs Nancy Pelosi said we would lose every month if the stimulus package didn’t pass. That would put unemployment at around, oh 167% next month. A rate that even an economy as dynamic as ours, might not be able to recover from.

Gold is also up from around $870/ounce in early April to close at $982.30 today, a rise of almost 13% in just about two months! Gold prices are a good sign of inflationary pressures. It looks like we’re going to be in for some pretty vicious price increases in the near future. I guess that’s what happens when you print money like we’re going to run out of paper.

In other news, perhaps Karl Marx had a bit of a point when he said capitalism would turn everything into a commodity. Sure, the system he envisioned got 100 million people killed when a bunch of vicious statists actually implemented it, but hey, at least he got one thing right. According to the New York Post, Natalie Dylan (not her real name) auctioned off her virginity online. The winning bid: a cool $3.8 million dollars! Unfortunately (I guess that’s the right word), the deal fell through. The “winner,” a 38 year old Australian businessman, had to back out. Shockingly, his wife wasn’t particularly pleased with his recent purchase and put some modest pressure on him to renege on his “contract” (and thus keep true to some oath he presumably took). Luckily for all you millionaires with ridiculously, creepy fetishes out there, Natalie is back on the market. Let the bidding begin!