Be Sure You Own Metal, Not Paper

2009-APR-29

An Essay by James Turk
Copyright © 2005-2006. All Rights Reserved.

'Does anyone really believe that in the industrial countries of the West, after the experience of the last half-century, anybody trusts the value of government-sponsored money more than he would trust money issued by a private agency whose business was understood to depend wholly on its issuing good money?'
          -- Nobel Laureate F.A. Hayek, Denationalisation of Money

It has been my view that we are in a bull market for tangibles and a bear market for promises. You therefore want to own physical things because their value derives from their tangibleness, and conversely, avoid financial assets because their value is based upon promises.

These diverse trends for tangible and financial assets began a few years ago when the stock market peaked (particularly the stocks of financial companies and banks), and gold began to rise. These trends have many more years left, so when viewing your assets, consider gold to be the bedrock asset of your portfolio.

You do not want to take any chances with your gold because gold provides unrestricted liquidity. That is its greatest advantage. It other words, it is money that is not contingent upon someone's promise. Gold is unique in this regard because it is the only money that is a tangible asset; in contrast, all national currencies are contingent upon the promise of some counterparty.

We are now seeing with the Refco collapse that promises can be broken. So in a financial crisis, you want to absolutely make sure that your gold is not dependent upon anyone's promise. You do not want to end up being an unsecured creditor - never.

Importantly, you will never become an unsecured creditor with GoldMoney. Your gold is safe and secure, which leads to the following email I received.

	Hello,

	I'm hoping this message will find its way to James Turk.

	I am a satisfied goldmoney.com user and I have recommended GoldMoney to several
	other people. Someone recently asked Chris Laird at the Prudentsquirrel.com
	about digital gold and received this response:

	> Digital gold is literally worse than paper money. It
	> is completely electronic and is really just a
	> promise of others...... not better than paper, to me
	> it is worthless in a crisis... subject to lies and
	> confiscation by the govt as well... JMO...

	If possible, I would like to hear your response to his criticisms.

	Thank you!
	JB

I hope that every GoldMoney user has read thoroughly the entire www.goldmoney.com website. The website explains why your gold is safe, but I would like to provide some important background information before addressing the above email.

GoldMoney was built to the highest standard of a very demanding taskmaster - me. My thinking was (and still is) that I would make GoldMoney as safe and secure as possible so that I would use it. After all, why build it if I couldn't use it for the reason it didn't meet my high standards?

After much serious analysis, I decided the best way to make GoldMoney safe and secure was to divide the responsibilities within GoldMoney among several well-established companies. To explain this point, GoldMoney is a process, and we have split the process among several first-class service providers. These companies are our business partners, and they include:

• VIA MAT, the company which owns and operates the vault where your gold is stored;
• ASL, a registered trust company regulated by the Financial Services Commission in Jersey, British Channel Islands, which manages GoldMoney's operations and all customer data;
• Lloyd's of London, where underwriters have arranged an insurance policy for all of the gold and silver owned by GoldMoney's customers;
• Euro-Dutch Trust Company, which creates goldgrams when it receives instructions from VIA MAT that gold meeting the standards of the London Bullion Market Association has been added to the vault, and removes goldgrams from GoldMoney when customers ask to redeem their gold in LBMA bars (which weigh approximately 400 ounces each);
• Deloitte & Touche, which completes audits of the gold owned by GoldMoney's customers in order to ensure that the grams of gold in the vault always equal the quantity of goldgrams recorded in the accounts of GoldMoney's customers;
• Foreshore Ltd, which operates several secure servers (including back-ups) from its offices in Jersey, British Channel Islands; and
• Several other companies who provide additional services, such as storage of encrypted backups of customer data.

Our business partners have two responsibilities. First, they contribute their expertise to the process which makes GoldMoney possible. Second, they work with the other service providers to make sure that the gold owned by GoldMoney's customers is safe, both in its physical form as stored in the vault and the way it is recorded in electronic form in customer accounts. With these companies working together in this way, the resulting checks-and-balances between these service providers protect our customers' gold. And what is GoldMoney's role?

We manage the process, but we cannot interfere with the process because we don't participate in it. Consequently, GoldMoney cannot take customers' gold out from the vault, nor can we create more goldgrams than there are grams of gold in the vault. By splitting the responsibilities of the process among many service providers and by excluding GoldMoney management from the process, but giving them the role to manage the process, GoldMoney is designed to ensure that our customers' gold is safe. Our governance procedures are second to none, which result in meaningful assurances of integrity.

Having provided this background information, I can now turn to the email above. There are six points that need answering:

1. 'Digital gold is literally worse than paper money.'
   Digital gold currency (DGC) is fundamentally different from paper money. Paper money is a liability of the Federal Reserve, and is thus, a promise. DGC is an asset. It is gold that exists in a safe, secure and insured vault, but can circulate as currency by 'clicking' some part of what you own to others if you choose to do so. You can, however, simply use your gold as a savings account, i.e., saving and accumulating gold instead of any national currency.
2. 'It is completely electronic...'
   Yes, and that is one of its advantages. You have the convenience of accessing your gold 24/7 from anywhere around the world through the Internet.
3. 'It is really just a promise of others...'
   No, it is not a promise. This point is very important from both a legal and accounting point of view. It is the difference between 'bailment' and 'deposit taking', and highlights the point that GoldMoney is not a bank. Bailment is the basic legal principle upon which GoldMoney is built. Our customers own their gold at all times. GoldMoney is storing their gold for them with no transfer of title from the customer to GoldMoney. Accordingly, customer gold is booked by GoldMoney in its accounts as a memorandum item (i.e., off-balance sheet). In contrast, metal accounts at banks are very different. When a customer deposits his gold in a bank, title transfers from the customer to the bank. Accordingly, a bank will book customer gold in its accounts as a deposit liability. These are promises to pay gold, and are therefore a direct liability of the bank (i.e., an on-balance sheet item). Consequently, the legal and accounting aspects of bailment and deposit liabilities are fundamentally different. Banks occasionally accept gold on bailment (i.e., safekeeping). But because banks earn greater margins from lending rather than safekeeping, their incentive is to create deposit liabilities, which they in turn lend to earn interest income. This process increases the bank customer's risk. Defaults or government imposed force majeure actions may relieve banks of their obligation to pay gold to their customers. Consequently, this reality provides a key competitive advantage to GoldMoney. By choosing non-bank vaults such as Via Mat, customers know that their gold is never placed on loan, a result that is never quite so clear when gold is placed with banks. Further, banks typically receive the right of offset against customer's gold placed in safekeeping with them, thus again exposing the gold holder to additional risks.
4. 'It is worthless in a crisis'
   No, DGC excels in a crisis because DGC is totally independent of the world's banking systems. If your bank or brokerage firm closes its doors (like Refco), your gold in GoldMoney is still safe, and you will have access to it.
5. 'It is subject to lies...'
   Yes, this is true. So you must take care to make sure that you are transacting with a reputable DGC operator like GoldMoney. You have to make sure that your gold is safe, and I have a warning in this regard. There are companies out there pretending to be safe like GoldMoney, but no one - and I repeat this point, no one - has the governance, security, safety and standing of GoldMoney.
6. 'It is subject to confiscation by the govt...'
   Yes, this is true too. But so is every tangible asset subject to government confiscation, and for that matter, every financial asset is also subject to this same risk. With gold, however, you have an important advantage over financial assets. For example, governments can make paper money to be worthless by the stroke of a pen, with today's green-colored notes replaced by notes of a different color. Governments cannot of course make gold worthless, nor even demonetize it. That's what President Nixon tried to do by declaring in August 1971 that the dollar would no longer be defined as a weight of gold. The dollar inflation and monetary debasement since then demonstrates that he has not demonetized gold, but rather, began a process that is slowly demonetizing the dollar.

Is GoldMoney the proverbial 'silver-bullet' that offers all things to all people? Of course not. But if you want convenience, an economical way to buy gold, the safety of first-class service providers managing and insuring your gold, and international diversification by storing your gold in London, then GoldMoney might be for you. Indeed, it apparently is the choice for many people because GoldMoney is growing by leaps and bounds. We are presently storing over $62 million worth of gold for our customers. This growth shows that with our strong governance procedures we are obviously on the right track.

Lastly, our GoldMoney customer support group and I always welcome feedback about GoldMoney. So always feel free to contact us with your comments, like the email above.

Our business philosophy is simple, and grounded in the principles of the Austrian School of Economics. As its leading proponent, Ludwig von Mises, observed so clearly, the 'consumer is king'. Companies stay in business by meeting customer demands. While we take many steps to reach that goal, we do that first and foremost by making sure our customers' gold is safe.