Martin Armstrong: The Rise and Fall of the Euro

Martin touches on many of the concepts that I embrace. One of those concepts is that a single money cannot serve all purposes, as a unit of exchange and as a storehouse of value. As a unit of exchange it always must inflate through the creation of credit. In doing so, the value holding ability is impaired if supply expands faster than economic growth. But, if there is a competing form of money that serves to hold value by design while relinquishing the duties of unit of account and exchange, it can serve as competition for the saver’s capital. This is the essence of Freegold with gold serving as competition to the dollar for the saver’s capital.

Martin is correct in that money has no intrinsic value in itself, including gold. Money serves as a marker or a holding place that enables a barter transaction. The actual goods and services traded is where the value lies. Value of money cannot be fixed because supply and demand for money will always vary. So, money is indeed much like a commodity. Attempting to fix the price of a commodity never succeeds and only causes aberrations within the market that end up causing dislocations. The same applies with money. Money must be free to seek its appropriate value that market place assigns. The market must have the ability to choose what form of money serves the best purposes. Savers are concerned with capital preservation, while investors are concerned with capital growth at an acceptable level of risk. Consumers want access to credit at reasonable rates. Each must have a choice as to where their capital is allocated. A single money cannot serve all interests.

We need a reserve asset that cannot be inflated, gold. We also need a money that can be inflated to keep up with economic and population growth. The system is currently in place and ready to go forward minus a very important thing: gold is still be used as a fractional reserve asset and its supply is being inflated through the creation of “paper” supply. This paper supply is doomed to failure and will disappear when enough people demand physical gold to close gold transactions. Along with the destruction of this paper supply, the price of the remaining physical supply will skyrocket.

We are seeing this today with Venezuela and the re-repatriation of its gold from the Bank of England and various bullion banks. The banks holding the gold have long since loaned the gold out to be sold forward into the market. Now, Chavez wants his gold and those same banks must go out into the market and purchase the gold they claim to still hold. When they do so, the supply of gold will dwindle in the amount that is repatriated and will represent “paper gold” that no longer exists. Demand has not changed one iota, therefore price must rise. Ultimately for Freegold to be a reality, all the value held in paper gold supply must be transferred to physical supply. Once this is accomplished and further production of paper gold is prohibited, a second form of money specifically designed for the saver will be created. Capital will flow into and out of fiat into and out of gold as the market decides which form of money offers the best opportunity and risk profile.

Without further ado, here’s Martin’s latest:

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4 Responses to Martin Armstrong: The Rise and Fall of the Euro

  1. Dave says:

    Bravo! I’ve been reading these sites for a while now, and this is the best concise definition of Freegold I’ve come across. And as I have not had the patience to read through those long treatises, it’s just never been that clear. Keep up the good work, thanks!

    • MatrixSentry says:

      I am glad you find some insight in this important concept. Freegold is not really complex, but it does not lend itself to a few lines of summary. I have developed a fundamental understanding of Freegold as my knowledge in other areas gelled. I believe Freegold is best understood by approaching from multiple directions. Many times you end up facing Freegold when you least expect it and you say “aha…now I understand when FOFOA said…”. Read FOFOFA real slow and don’t be afraid to go back and read things 2 or 3 times. It seems one must earn Freegold and when the understanding comes it yields a great feeling of accomplishment and gives you a ton of confidence.

      Best of luck to you! See you out there on the gold trail!

  2. Hi, Ron,
    Randy here.
    Believe it or not, but I’m holding some GLD Oct 169 puts which I’m getting my ass handed to me on, but I’m wondering: With Uncle Hugo wanting his gold in his own hands, do you see GLD’s counter-party risk being exposed to the Market as a whole?
    Also, I want to thank you for that SLV call you recommended a while back. I’m watching to see if SLV will go through 47-ish before I begin to get nervous about taking my profits on that. Do you see headed higher than that?

  3. MatrixSentry says:

    Hey Randy,

    The answer on GLD is yes, but it could take some time. The problem with making all these calls is the time factor. GLD is great idea and works wonderfully, until it doesn’t, just like fractional reserve banking. The same issues with fractional reserve banking during a bank run (pre-FDIC and pre-Fed) are present with GLD during a run on physical. Now specifically, will it be Chavez that breaks the camel’s back? I doubt it. But, it could lead others to do the same and a resulting chain reaction. That might be enough to cause a panic into physical.

    When the inevitable occurs, the first thing that will get depleted of its physical is GLD. The primary dealers can convert their shares to physical ounces by using “baskets” consisting of 100,000 shares. These same primary dealers are also the bullion banks that are short gold on the Comex. So, when they need to get gold quick to put out fires on the Comex or need to deliver gold in London via the LBMA, they simply redeem baskets of GLD. The game is always rigged in the bank’s favor, ordinary share holders cannot ever get physical for their shares. When the market recognizes that GLD’s inventory is decreasing while gold price is rising rapidly rising, there will be a mass exodus from it and it will effectively de-link to gold.

    I still use GLD to trade, but my duration is short and I only use options. At some point gold is going to correct like you read about and the puts will perform. The reason I am not trading counter-trend is that TA has less predictive power these days and the nature of this market is changing. We are getting closer and closer to a dislocation event that could change everything overnight.

    As far as SLV, it will be bombed in a big way with a sustained hit to gold, say 10% or so. But, if we continue to see gold hold strong and make a play for 2000, it will perform. I would watch the technicals in silver and take profit when we get over-bought via a trailing stop loss or trailing stop limit. With a gold run to 2000, I believe your 47 is in the bag and likely a play for the spike high is in the cards. I would also look for the Banksters to paint a double top in silver to try and save their asses. When silver blows it will something to see and might lead to the the demise of GLD by detonating SLV first. With that said, I haven’t been playing in silver because of concern with gold and the potential for a giant leap toward Freegold.

    The Bernank is going to say something Friday to try and calm the markets and slow this move to gold. I am curious how many more rabbits are in this guy’s hat. We’ll see.

    Good luck out there!

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