Wednesday, January 22, 2014

Forward thinking: The dollar, gold, silver, and bitcoin

Oh boy, the tizzy that is being caused by the "weaker" Canadian dollar is quite entertaining. Few seem to have the first fucking clue what's happening and so in my less than graceful way I will attempt to explain.

First of all though before even trying to understand you must watch Mike Maloney's "hidden secrets of money" because there is a bunch of basic hocus pocus within our monetary system that you must understand to have the first idea what's going on (I'll be reworking the Key concepts soon and including his videos as I'm not currently happy with the way their information is organized). Go on, watch it, this post will still be here when you get back.

Alright, all caught up? Good.

So what's happening with the Canadian dollar? Why all of a sudden is it tanking against the U.S. dollar? If you were to believe typical Canadian economists you might think this is because of the actions (or inactions and announcements) of the Bank of Canada (and it is, sort of). However, as per usual, they're behind the curve and being this blog is about foreword looking trends and forecasts I'm sorry to have to inform them they are basically describing 2012 and last year. The trend has now changed, at least in appearance, though overall the trend is the same it's simply that certain circumstances have temporarily changed.

There is one reason, and only one reason that the CAD has dropped significantly against the USD in the last month (as opposed to before where both the USD and the CAD were free-falling). The Federal Reserve's supposed attempt at a "taper".

It is not that our dollar is "getting weaker", it's that the USD has slowed it's decent while the CAD policies have kept us in the race to the bottom. However, as Jim Rickards accurately describes, this taper, like all previous tapers (they weren't called tapers then) isn't going to last very long.

So you might be wondering then why Canada is still maintaining policies to keep us in a race that is taking a temporary break? Canada is now stuck in a liquidity trap of it's own making. I declared the beginning of this the "Canadian Housing Conundrum" (which is still probably one of the posts I've had the most fun putting together to this day I might add).

Vancouver's housing 2nd least affordable in world
Canada while originally chasing the U.S. dollar's devaluation to maintain a minimum level of exports with them has put itself in a position where we now need this cheap liquidity. When the central bank talks about "low inflation" (or disinflation, stagnation), as we've discussed recently, they are really talking about credit deflation or put simply a lack of new loans. This is why despite a clear housing super-bubble banks are again quietly lowering their own mortgage rates. Banks are also predictably putting extra fear on the gold concept in tandem because you know that these fuckers want you to sell so they can buy before the FED inevitably ends up having to pump QE up again, which will of course drive up gold as even though it is being supressed and manipulated by the banks in the same manor as LIBOR and oil it is still not sufficient to stop it from at least partially accounting for the huge expansions of currency that have been going into the system and the elite's will be profit taking it up the ass the whole way.

Metals, Currency Rigging Is Worse Than Libor, Bafin Says

Alright, that's where we're at currently in terms of the CADUSD, any questions?

Moving on. I haven't covered bitcoin very much on here. I don't really cover any particular commodity or currency, this blog isn't about making money tomorrow, it's about preparing for the years ahead. I've had several conversations on bitcoin on Twitter and whatnot where I've said I have reservations about it but have never really had the time to expand on what those reservations are so I'm going to state my positions on gold and silver and bitcoin now. However, these are simply my positions on them, this is in no way financial advice. This is simply my own long term outlooks.

First we'll go into bitcoin and a quick overview of how I see bitcoin. Whether Canada or Finland want to declare bitcoin real money or not doesn't matter. The irony of course being that both countries' "legal tender" is currency, not money. Finland explicitly stated that it is because there is no central authority that it fails the "money test" (A central authority is not part of the money test, btw - again, refer to Mike Maloney's videos) yet their own currency fails a real monetary test: store of value.

Now for those not familiar with the bitcoin mining process you might be wondering why I believe bitcoin has a store of value and why it is not fiat or debt based in nature even though it is virtual. Bitcoin and cryptocurrency in general is in fact backed by a hard asset: electricity. Literal energy, where as gold is stored energy in a physical form bitcoin represents literal real time energy which was paid for out of the miner's pocket and stored in a virtual representation we call a bitcoin.

The cryptography of the mining process ensures this coin can not be duplicated. There can not be more bitcoins in existence then there is electricity to create them. From this stand point they are more secure than gold as financial instruments like gold or silver ETFs can be counterfeited and you never really know if you own the resource you claim to unless you actually go and try to pick it up.

Bitcoin has also taken a sizable chunk out of gold. If the flight to bitcoin had not happened this year do you believe that currency wouldn't have tried to find another safe haven? Bitcoin in just one year approached gold's levels and then tapered off, that's not a coincidence. Much of gold's growth went into bitcoin instead.

Growth really is incorrect though, these are hedges against dollar devaluation, the value of the resource is not really growing, the value of the currency is shrinking.

Bitcoin has a major downfall though which for me has ruled it out as a long term store of value. Bitcoin's strength is also it's weakness, it's direct reliance and correlation with electricity. For you to trade bitcoin you need electricity, there is no physical representation and even if there were to verify it's authenticity it would need to be validated against the bitcoin blockchain anyway.

Why is this a problem for me? Well as I said, this blog is about the long term and it's about you making it through the coming turmoil, it is not about making money. It's a problem because the approaching turmoil, both natural and man-made, doesn't come with an "electricity included" guarantee.

For long term storage I want something that is going to be tradable even during prolonged periods of blackout and also something that retains value despite political turmoil, changes in government, and economic collapse. For me, the only contenders are gold and silver, you can be reasonably sure that in the best and worst of times you'll be able to either trade it directly and/or trade it in for something that can be traded or "legal tender".

I see bitcoin playing an important role as a sound money replacement for modern electronic transfers. It is more secure without a central authority than any central authorities so called protections. The problems, and hacks, of bitcoin have had to do with the exchanges trading bitcoin, not the bitcoin blockchain. This distinction is important, the difference is the same difference as though you were trading on the NYSE and your account on the NYSE got hacked. Is it the currencies fault? No, it's the exchange. Bitcoin, the money, has not been hacked or counterfeited. What central authority can claim the same?

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.


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