*** Begin 10/02 ZI Excerpt
Inflation in the Information
The world has never witnessed
anything remotely like the Information Age before. No one alive
today can even start to comprehend the ultimate impact it will
have on human affairs, including the organization of governments,
taxation, and money. Finally we the tax cows can communicate
directly without being censored by the tax farmers, and the potential
for revolutionary change is extraordinary.
As increasing numbers of citizens
of countries around the world begin to ask the crucial question
"Why do the costs of my life's necessities keep rising ever
higher every single year?" many will hop on the Web seeking
answers. Search-engine technology will lead them to websites
discussing money and inflation, and the insatiable spark of the
lust for more knowledge will be kindled.
As hardworking ordinary people
educate themselves using information technology and start to
understand why their savings are worth less and less each year,
Keynes' "one in a million" who really understand will
gradually grow to one in ten. These legions of newly enlightened
citizens will start telling their friends and neighbors, who
will be inspired by their spirit of Renaissance-like knowledge
and will head to the Web themselves to learn more. An info-revolution
Just as you sitting on your
patio with a fully-loaded 12-gauge riot shotgun will deter most
any common thieves, citizens armed with the knowledge of inflation
will deter government theft by subterfuge. If you know your house
is about to be robbed, you can prepare ahead of time to head
off the coming theft at the pass. You stay home, turn on all
the lights, and load that fearsome shotgun up with 00 buckshot!
The same principle is equally powerful with inflation.
Theft by inflation is only
fully possible if you are holding the particular fiat currency
that your government issues. If you live in the States, you can
only be fully plundered of your hard work and labors if you are
holding dollars. If you live in Europe, you are only fully subject
to stealth inflationary predation of your savings if you hold
euros. Yet, and here we come full circle, you can inoculate yourself
from all inflationary taxation by merely owning gold!
Just like a Venetian merchant
of 700 years ago who committed his surplus labor to gold ducats,
every hardworking citizen today can do the same. Like every other
tax cow, when you hold gold you are still subject to direct taxation
by your tax farmers, but gold liberates you from the much more
serious and dangerous indirect taxation of inflation. By avoiding
stealth inflationary taxes, people are once again free to be
motivated to work hard, to spend less than they earn, to reach
financial independence, and to ultimately achieve wealth.
This concept is certainly not
new to you longtime gold investors, but you have to understand
that you are the ultimate contrarians on the very vanguard of
the new revolution. You are Keynes' ones in millions! I am confident
the amazing communications technology of the young Information
Age will gradually awaken legions of normal hardworking citizens
around the world to the horrific dangers of inflation. Knowledge
is power and knowledge now travels at the speed of light for
the first time in all of human history.
Gold's Oppressive Transaction
As the money information revolution
gathers steam, more and more people will realize they are facing
a second tax if they hold their savings in a pure fiat-paper
currency. They will discover that if they convert some of their
savings into gold today, any amount of gold will buy at least
roughly the same amount of real goods and services 20 years from
now as it will today. They will give themselves an effective
large tax cut by refusing to allow their savings to be confiscated
over time by inflationary stealth taxes.
Gold is the only perfect destination
on earth for capital to avoid inflation. The natural "inflation
rate" for gold is only on the order of a percent or two
a year. This means that the total world gold supply consistently
grows by only 1%-2% each year over centuries through normal mining
because gold is so incredibly scarce in the natural world. Contrast
this to real estate, a much less desirable inflation refuge,
as the number of houses and amount of livable space often explodes
up by double-digit percentages every year. Only gold has an unblemished
six-millennia record of retaining its raw purchasing power through
every conceivable environment.
Newly enlightened people tired
of paying the second inflation stealth tax will not commit their
entire portfolio to gold, and they shouldn't per diversification
theory. We continue to advise our private consulting clients
today that everyone should have between 5% and 20% of their total
liquid assets invested in physical gold. The coming legions of
newly aware inflation refugees will probably allocate a similar
percentage of their savings to gold. Obviously this will all
vastly boost gold investment demand and lead to much higher gold
prices, yielding truly legendary gains for today's early-bird
contrarians with capital already deployed in gold.
Yet, a significant problem
will arise as folks attempt to apply theory to their reality.
The coming inflation refugees will be familiar with stock trading,
but not the countless nuances of the gold markets. By definition,
since these people learned about predatory inflation and its
golden inoculation on the Web, they will be information-technology
Here at Zeal LLC, my partners
and I happily use Datek as our primary brokerage for short-term
speculations like our equity-index options. It continues to blow
my mind how efficient and effective it is for trading. I can
trade any conceivable US stocks or equity options almost instantly.
On an average trade, Datek blasts out the finished trade confirmation
via e-mail less than 5 seconds after I order the trade. Often
the executions occur under 1 second after my orders are entered
via the Web.
The technology is truly awe-inspiring!
In addition to being fast and always working perfectly, it is
very inexpensive. Datek charges $9.99 to trade a limit order
of up to 5000 shares. If you bought 5000 shares of a $20 stock,
your effective commission would only be 1/100th of 1%! While
Datek happens to be our favorite online brokerage for speculative
accounts, it is certainly not unique. Other brokers offer similar
instant trades at fantastically low commissions.
The coming wave of tech-savvy
inflation refugees will be used to and demand this level of service,
performance, and cost structure from their brokerages. They will
want to think about gold and own it 5 seconds later. Delays in
financial services in the Information Age are not acceptable.
Most of you reading this letter
have already liberated some of your precious savings from inflationary
predation by buying physical gold. You know the drill. While
it isn't hard to buy gold, it certainly would never be considered
efficient, instant, and inexpensive today. If one lives in a
city, one has to jump in their car, drive down to the local coin
shop, hope the merchant has whatever gold coins they want in
stock, haggle on price, buy the coins, and drive all the way
home. It can take many hours just to buy gold!
Gold can also be purchased
on the Net, but it is also inefficient. One has to first find
a reputable and honorable dealer, then call or use the Web to
order the gold, and then wait a week or two for it to arrive.
Compared to buying a stock online, buying gold is like getting
teeth pulled. And we haven't even discussed the looming sticker-shock
On Datek you can buy $100,000
of stock for $10. In addition to Datek's trivial commission,
you pay a small fractional price over the current stock bid price,
the ask price. For argument purposes, let's assume this market-maker's
spread is $0.05 on each $20 share. At 5000 shares, this adds
up to a total bid-ask spread of $250. For a total cost of $260
you can plow $100k into an equity of your choice.
Gold, on the other hand, has
horrendously high transaction costs. Your local coin dealer must
buy his gold from a wholesaler. He probably pays 3% over the
wholesaler's cost. Hopefully the wholesaler bought near the spot
price so his cost was reasonable. The wholesaler has already
paid the bid-ask spread on gold from whomever he bought it from,
so this is already included in the new gold price.
Then your coin dealer, like
any good capitalist trying to feed his family, has to raise his
gold prices high enough to pay all his overhead and still make
a profit. Let's conservatively assume another 3%. If there is
a 1/2% bid/ask spread in gold plus a 3% wholesaler markup and
another 3% retailer markup, the total transaction costs for buying
physical gold are 6.6%. If you want to shield $100k of your hard-earned
savings from inflation by buying gold, you are looking at not
only spending hours to do it, but paying a huge $6600 for the
Unfortunately this example
is in line with reality today. If you are aggressive and shop
around you may be able to get total transaction costs whittled
down to 3%-4% on $100k of gold, but 6.6% is probably what the
average inflation refugee will run into. At this point our whole
inflation-refuge model starts to fall apart as many new gold
investors will probably throw up their hands in disgust and walk
away after experiencing sticker-shock. $260 for $100k in stock
or $6600 for $100k in gold. Yikes!
Gold in the Information
Interestingly, the same Information
Age technology that can liberate ordinary people from ignorance
about money and inflation can vastly reduce the transaction costs
burdening gold. It seems odd at first, but bleeding-edge 21st-century
technology combined with the legendary Ancient Metal of Kings
is a perfect marriage. One wondrous innovation that already exists
today that is growing in importance is the use of digital gold
as a transactional currency. I penned an essay on digital gold
earlier this year called "Gold
in the Information Age" that is available on our
Visionaries like James Turk
redefining how gold is used in commerce. Digital gold enables
global trade to be easily settled in gold. Physical gold is centrally
stored in secure vaults and 100% gold-backed encrypted and irrevocable
rights to this gold are the actual digital currency changing
hands over the Internet. E-Gold's slogan says it all, "Gold
itself, circulated electronically." Digital gold is probably
the biggest innovation in money since the introduction of the
Venetian gold ducat in 1284 and is likely to vastly change the
landscape of global trade in the next century. It is not the
only gold innovation!
What if Gold Mated with
Last month in these pages I
said, "[Newmont President Pierre Lassonde] launched a bombshell
and mentioned that he is working together with Chris Thompson
and the World Gold Council on a new gold instrument which could
take 500 to 1000 tonnes of gold off the market annually, which
would be an impressive increase in overall demand estimated at
4000 tonnes per year."
"Coming from an unabashedly
bullish gold legend running the biggest gold mining company on
earth, these comments are super exciting. It will be interesting
to see what Lassonde and Thompson come up with in a new gold
instrument!" Thanks to an astute CBS.MarketWatch.com
reporter, and our backchannel sources around the world, the veil
on the WGC's new gold project has been removed.
The WGC is working to create
an exchange-traded fund (ETF) security for gold itself! I have
to admit that this announcement has made me more excited about
owning gold and gold stocks in the coming years than anything
else I have recently seen.
This seemingly obviously simple
innovation, the marriage of gold with advanced trading technology,
could fundamentally alter the core balance of power in the gold
markets forever. Rather than governments and central banks having
the initiative and attempting to control the gold price, tens
of millions of individual investors and speculators worldwide
could wrest control away from socialist 20th-century dinosaur
institutions! The gold world may never look the same again if
the WGC can pull this off.
Perhaps my great zeal for this
revolutionary announcement can best be communicated by a diversion
into QQQ-land. Just like us, many of you are actively trading
the QQQs themselves or options on the QQQs. "QQQ" is
the symbol for an ETF that tracks the elite NASDAQ 100 stocks.
While it would be extremely complicated and take huge amounts
of money and time to individually buy each stock necessary to
build and maintain a custom-designed portfolio that perfectly
tracked the NASDAQ 100, the QQQs do all the work.
An investor or speculator can
easily trade a QQQ in their online brokerage stock account just
like any other stock. Commissions for trading are trivial, as
I described earlier. Since its introduction on March 10th, 1999,
fatefully exactly one year to the day before the legendary NASDAQ
2000 bubble top, the QQQ has taken the financial world by storm.
Today the "Cubes" often command the top spot each day
in terms of actual daily trading volume.
On September 27th for example,
the QQQs traded 92m shares, more than any other stock in the
world. At a $21 close, this is the equivalent of almost $2b changing
hands in one day. At month's end, the NASDAQ reported that there
were 734m QQQs outstanding. The net assets in the underlying
ETF trust were a staggering $16b!
Unlike a typical mutual fund,
the ETF has an extremely low expense ratio as well, 0.2%. Owning
the QQQs is far cheaper than purchasing a standard NASDAQ 100
index fund. The QQQs have become so immensely popular because
they are efficient, inexpensive, easy to trade, and they allow
speculators of any size to place bets on the NASDAQ 100.
Before the introduction of
the Cubes, only futures traders could directly play the NASDAQ
100. Futures accounts are cumbersome though. They are expensive,
demand a steep learning curve, and carry margin requirements.
In addition, many futures trades often carry the risk of unlimited
losses. It is a very risky and highly-specialized game.
The QQQs bypassed NASDAQ 100
futures and brought the power of speculation to the people. Even
though they were down 36% in 2000, 33% in 2001, and are off 47%
YTD due to the NASDAQ bust, they remain the speculation vehicle
of choice for many of the world's index traders.
Buying and Selling Gold
Just as high transaction costs
made NASDAQ 100 trading difficult for individual speculators,
gold trading is tough for small players today. Gold futures are
very risky, bear the danger of margin calls, and each contract
only covers a limited time horizon before it expires. Most ordinary
folks rightfully want nothing to do with the futures markets,
shutting down this avenue of gold speculation for them.
On the other hand, the gargantuan
transaction costs of physical gold make short-term trading of
gold coins all but impossible. If the gold ETF flies, it would
solve both these problems at once and open up a vast new audience
With a gold ETF available,
one of the new wave of inflation refugees could easily buy gold
in seconds for a trivial commission using their existing brokerage
accounts. Granted, electronic gold is no substitute for physical
gold in one's own possession as the core foundation of a prudent
portfolio, but ETF gold is a great starting point for gold rookies.
Hardworking tax cows who are
tired of the second indirect tax the government tax farmers are
secretly levying on them through inflation would finally have
a quick and easy means of leveling the playing field. They could
buy shares in the gold ETF as a first step and be protected from
the inflationary ravaging of the dollar. This wouldn't kill coin
dealers either, as there is no substitute for actual gold coins
in one's own immediate physical control. As gold ETF investors
become more knowledgeable as time progresses, many of them will
probably augment their electronic ETF gold with actual physical-gold
In addition to the long-term
gold inflation shelter a gold ETF could provide for everyone,
it would also be the perfect vehicle for speculation. The QQQs
are so popular today not because people want to hold them for
years, but because they want to trade them! If gold itself could
be traded via the ETF in an ordinary brokerage account, the increased
interest in speculating in gold could be tremendous. In addition,
just seeing the symbol of the gold ETF alone quoted everyday
would spawn great gold awareness.
The Birth of a Golden Leviathan
Just like the QQQs represent
shares in actual NASDAQ 100 stocks, the gold ETF would represent
true fractional ownership of real physical gold. Although no
specifics are available yet, a gold ETF would create an enormous
new channel for physical gold demand. As investment and speculation
demand for the gold ETF rose, the trust underneath the ETF would
have to buy more physical gold in the open markets.
This gold would be stored in
secure vaults with reputable companies. Each ETF share for example,
if it cost $50 would represent $50 in real gold stored somewhere.
Chris Thompson, former CEO of Gold Fields and now Chairman of
the World Gold Council, "If it's backed by the gold council
and there is a big, recognizable gold depository involved, it
will be a big success."
In Australia Newmont President
Pierre Lassonde recently said the gold ETF could increase gold
demand by 500-1000 tonnes annually. This number is enormous and
could fundamentally alter the gold scene as current global demand
is believed to be 4000 tonnes on fresh mined supply of 2500 tonnes.
If a 1500 metric ton annual
natural gold deficit increased to 2500 tonnes (5000 tonnes total
demand), the gold price would have to soar to attain stasis in
market-clearing equilibrium again. If the gold ETF grows as large
as the QQQ trust is today, $16b would take an impressive 1531
tonnes of gold out of circulation at $325!
Additionally, all gold ETF
demand would feed a virtuous circle which spawns even more gold
demand. As the gold ETF rises in popularity, more physical gold
will be purchased by the trust. The trust will take in dollars
contributed by shareholders and spend these dollars to buy gold.
Eventually, if demand is high enough, the ETF alone selling dollars
to buy gold could push the gold price up. This will create even
more demand for gold investment and speculation worldwide!
For as long as there has been
commerce and government, citizens have struggled to protect their
hard-earned savings from inflation. The combination of the limitless
resources of the Web educating tens of millions of people about
money and inflation and an efficient gold ETF could lead to an
unprecedented grassroots gold boom.
The best information we could
obtain this month indicates the gold ETF could become a reality
as early as spring 2003. Gold and gold-stock investors should
get ready and strategically deploy capital ahead of time before
the new wave of popular ETF-driven gold demand descends upon