Welcome to the Friday mailbag edition of The Daily Cut.
This week, lots of alternatives to government-issued currencies have been on your minds – gold, bitcoin, and company-created cryptos. Dan Denning and Teeka Tiwari are on deck to address your questions on these alternatives…
But first, one reader asks about a currency idea you haven’t seen in these pages: an oil-backed dollar. Standing by with an answer is commodities investing expert Nick Giambruno…
Reader question: Here’s a fun idea… what if a desperate United States government were to nationalize the domestic oil industry and use that asset to back the dollar? An oil-backed dollar? If a foreign central bank wants to dump its dollars, we will send tankers of oil and, maybe, give it the tanker, too. Any thoughts to share?
– John W.
Nick’s answer: Oil is useful for a lot of things, but not as money.
It brings up a commonly misunderstood concept.
Industrial use is not needed to make something money.
The use of something as money itself is sufficient for it to be money.
The fact that gold has some industrial use doesn’t give it its monetary properties. People value gold as money because it is durable, divisible, convenient, consistent, scarce, and hard to produce (relative to existing stockpiles)… not because it’s used in dentistry, electronics, or other industries.
On the contrary, I’d argue that gold’s relatively small industrial uses are a weakness, not a strength. Gold would be an even better money without the variation in its supply/demand that comes from its industrial uses, which are unrelated to its use as money.
When it comes to money, I’m interested in a purely monetary good, which simply means something good at storing and exchanging value. I’m not interested in something whose value is hostage to the whims of ever-changing industrial conditions. In my mind, that rules out oil as being useful for money.
Now, a question about a more classical form of money – gold. One reader asks Bonner-Denning Letter co-author Dan Denning about the future of the metal…
Reader question: When precious metals have rocketed to wherever they are destined to move, what will be the point of them? Eventually, doesn’t everyone end up in the same boat, i.e., with a smaller or bigger pile of nearly worthless dollars? And will there be buyers of gold at ridiculous prices?
– Chad B.
Dan’s answer: This is a really important question, Chad. Thanks for asking for it. Let’s start with the last part first. There most definitely will be buyers of gold and silver at ridiculous prices, just as there are buyers of Tesla and Apple at these prices. At the tail end of a mania, prices go crazy.
But that is not why we recommend owning gold and silver bullion in The Bonner-Denning Letter. We think gold is a medium for saving your purchasing power, but not a good medium of exchange.
Nor do we expect it to be legal tender and replace the dollar. You save in gold. But you’ll have to spend in some government-issued currency. Hopefully THAT spending money is from your bank account or income.
If we’re right about an eventual monetary regime change (some new form of the dollar), then yes, you’d have to convert your gold into that new medium of exchange.
There are other people who can show you how to speculate to make dollar gains in gold mining stocks or exchange-traded funds. But for us, fundamentally, gold is a defensive trade. Think of it as a lifeboat for your purchasing power, getting from one side of a monetary crisis to another.
Finally, a reader is concerned about the possibility of businesses issuing their own money. Crypto expert Teeka Tiwari is on call to reassure bitcoin investors…
Reader question: How will bitcoin and altcoins be affected by the cryptos that Amazon, Facebook, Google, and whoever have created to take over the dollar?
– Charles A.
Teeka’s answer: Thanks for your question, Charles. To be clear, Facebook’s Libra isn’t a true cryptocurrency. It’s a digital coin that’ll be pegged to a basket of major currencies (like the dollar and the euro).
But while bitcoin is still too volatile to use as a daily form of digital money, Libra could pose a legitimate threat to the U.S. dollar. Think about it…
Facebook has a global userbase of nearly 2.4 billion people. Libra’s adoption would be almost immediate if it launched today. It would become the world’s most widely used currency overnight.
And imagine if Facebook negotiates with advertisers to give Libra users 5-10% discounts on all their products and services. How would governments or central banks compete with that?
They can’t – which is why they want to stop Facebook.
In fact, some lawmakers have proposed a bill to ban Big Tech firms from issuing their own digital currencies. According to Reuters, the “Keep Big Tech Out of Finance Act” could impose up to $1 million in daily fines.
Clearly, the idea of corporate-issued money spooks the feds. And it’s no wonder why…
If Libra works, how long before Amazon issues its own coin?
As the world’s largest e-commerce platform, Amazon conducts over $239 billion per year in trade. (That’s more than the GDP of Portugal.)
What happens to the dollar if all that trade migrates to Amazon’s coin? And what if Apple, Google, or Uber follows suit?
You can see just how much the world will change if Big Tech brings its fierce competitiveness to the global currency game.
So it makes sense President Trump has come out against Libra.
Now, the U.S. government can potentially derail Libra. So I understand if you’re worried about governments cracking down on these corporate “coins.”
But can it do the same to bitcoin?
In terms of intervention, it’s proven impossible for governments to shut down or influence bitcoin’s network. China has tried to ban bitcoin exchanges, yet crypto trading still flourishes there.
So Libra may become an important digital alternative to the U.S. dollar (if regulations don’t kill it first). But it’ll never offer the safety, security, and pseudo-anonymity of true cryptos.
A rise in corporate coins will actually be great for true cryptos, too. You see, companies like Facebook will take crypto mainstream.
As they spend time and money educating their users, some users will naturally investigate bitcoin. And they’ll discover it’s very different from Libra.
While Libra relies on a closed cartel of global companies, anyone can join bitcoin’s open network. And like a central bank, Libra’s “sponsors” can issue more coins at any time. But bitcoin’s computer code caps its number of tokens at 21 million.
Look, Facebook embracing this technology’s terminology – and riding the coattails of blockchain interest – is very bullish.
These corporate coins will bring billions of new users to crypto. And the mass marketing will skyrocket the value of bitcoin and the rest of the crypto market.
Teeka’s answer above touched upon the technology behind bitcoin – blockchain. But he has a lot more to share with you. In fact, he believes this tech is kicking off an economic renaissance.
Teeka says those who take the right steps as this renaissance comes will grow fantastically wealthy. But those who don’t will fall far behind. So check out this free video Teeka recorded to ensure you’re ready for this financial shift.
That’s all for this week. Have a great weekend, and keep sending in questions for your favorite analysts. Our mailbox is always open at feedback@legacyresearch.com.
Regards,
Chris Lowe
August 28, 2020
Bray, Ireland