Why?

Because there is a market in money. All the world's currencies compete against one another. Each has a large "captive" user base, mostly in it's country of issue, but all are traded on exchanges, just like stocks. Traders who see a currency with weakness not yet reflected in its price will sell the weak one and buy something stronger. Although there can be price distortions, over time these tend to correct, and traders are rewarded for their insight.

Gold is one such currency, although it has no captive user base at the moment. The US dollar is another, with a large domestic user base and popularity around the world as central banks hold it in their reserves, individuals hold it for savings, entire countries use it as their means of exchange, and important commodities like crude oil are priced in it. Euros, Pounds, Renminbi, Yen, and many others also compete in this marketplace.

Gold is the strongest, safest form of money mankind has yet discovered. It has many uses, it is easily tested for purity and easily divided in convenient units. It does not rot, rust or corrode, it is rare enough that it takes real effort to obtain more of it, but not so rare that it cannot be had by anyone who wants to own some. Of course it is not perfect; nothing is! But for thousands of years people have been experimenting with various forms of money, and gold is the one form that has withstood the test of time, again and again.

Most people use the local brand of currency because it's easy. All the local banks use it, all the prices they see marked on the shelves when the go shopping use it. It is easy to obtain, easy to save, and easy to spend. In some countries, at some times, people have had little choice; use of the local currency was mandated by law. Holding or trading in foreign currencies without special permission from the government was a punishable offense. Often, taking the local currency out of the country in any meaningful amount was also a crime. In almost every country, "legal tender" laws force many types of transactions to be conducted using the local currency. You will need some, too; but just enough to facilitate your day to day transactions.

The last 30 years or so have been a time of fairly strong monetary freedom; people from all over the world have been able to own whatever currencies they wanted. They have been able to open accounts in other countries, to travel the world and exchange their home country cash for local cash or use their credit cards to make purchases when traveling, or from home over the Internet. Most have been able to own gold.

Storm signals are now flying, however – signaling the end of this period of relative freedom. Austerity measures, deficit reduction programs, tax increases, and new reporting requirements all point to a period of increasing government control and regulation. A period of increasing nationalism, of homeland security, of tightening borders. A period of diminishing freedom and privacy in many ways, but especially in terms of money and travel.

With a tip of the hat to The Daily Crux, I recommend this piece from the Expected Returns Blog:

There are certain periods of time in history when seemingly obscene prognistications are right. I believe we are in one of those times. It is at times like these that "conspiracy theorists" (whatever that means) become what I like to call "reality theorists." 

Economic shocks come from nowhere. One day the global economy is humming along; the next day it collapses. Crashes don't occur because the fundamentals suddenly change; they occur because the public at large recognizes the fundamentals and heads for the exit at the same time. What's crashing next is the public's confidence in governments across the Western world. You can guess how that will affect the price of gold.

And how it will affect freedom in general.

A great place to start is by dumping the local currency as your unit of account. Start thinking in gold terms, not in terms of the local funny money. But that is just the start.

If you do not own any physical gold, buy some now. Buy one little coin, even if it just one-tenth of an ounce. Hold it in your hand, put it somewhere safe, or carry it in your pocket, but get started.

If you do own some gold, think of it as your core savings position. Is it enough? Add to it until you can sleep well at night, knowing that whatever transpires in the markets overnight, when you wake up you will at least have that core position to work with. If you own stocks or other liquid assets that have been appreciating in gold terms, take some of your profits off the table and bank them as physical gold. If your stocks and other investments are declining in gold value, consider selling them and buying gold with the proceeds. You won't be making any money by doing this, but you will not be in a losing position, either. You will simply be holding the best, safest form of cash, keeping your powder dry until the time is right to invest in other assets that will appreciate in terms of gold.

You may want to diversify some of your savings into silver as well. Silver is more volatile than gold, and as it has significant industrial uses, and most of its production is as a side of-effect of base metal mining, its price is more strongly influenced by the state of the economy in general than is gold, which is primarily a monetary metal. Still, silver has a long monetary tradition, and because it is less rare than gold, it is more useful in smaller, everyday transactions. This is why the US issued silver dimes, quarters, half-dollars and dollars, but used gold for five, ten and twenty dollar coins.

Holding gold and silver is a great start, and provides you with a form of savings that is insulated from the devaluations and defaults of governments, both subtle and blatant. This will give you options and expand your freedom, but it is not enough. Money is a wonderful thing, but it is not the only thing, or even the most important thing! Think about what is most dear to you… and try to set up a framework that will give you options to maximize that.

Protect yourself from the coming blizzard of restrictions and regulations while there is still time to maneuver. You want to be able to decide where you will live, where you will travel, who you will associate with and do business with, as well as what money you will use, and where you will keep it. Having viable choices is what freedom is all about.

The key is to act before it is too late, before everyone else is rushing to the exits. Do not allow yourself to be lulled into a sleepy daze by the entertainment spread around you by the media. Do not drowse in the warmth of the water in the pot as it heats slowly toward the boiling point. Do not allow the other crabs in the pot to pull you back in if you decide the time has come to make a break for it.

Do it for yourself. Do it for your family. Do it for future generations. But get started now!

"If you want to end up with the economy of Pakistan, the politics of Ukraine and the inflation rate of Zimbabwe, bank nationalisation is the way to go."

They suggest some ways to avoid a few of the potholes in the bank recovery roadmap, but ultimately it comes down to having the political will to do the hard things, to deliver sufficient pain to the banking and financial elite that created the mess in the first place with the willing collusion and encouragement of government. Pain that must be confronted to cleanse the system of toxic waste and moral hazard. What is the chance of this type of solution coming out of a bipartisan working group? And if it was offered, what are the chances of it being implemented? And if tried, how long would it last before being abandoned as "un-workable"?

It is so much easier to just put the patient on an IV drip of stimulants and pain killers… which the Fed is happy to provide in many forms, most powerfully by "quantitative easing" and "expanding it's balance sheet", also known as "printing money".

Of course, most of the "experts" say that once the crisis has passed, and things are "back to normal" (whatever the heck that means) the Fed can simply "drain excess liquidity out of the system" to avoid any serious inflation. This is roughly the equivalent of taking the patient, now living in a happy pain-free daze, out of the heart-lung machine, pulling the IV drip, and sending him home to go cold turkey. And handing him a huge bill – equal to a large fraction of his annual income – as he checks out of the hospital.

You get the picture.

What is the solution? Have some money that has no counterparty risk and cannot be counterfeited, even by governments. Of course that means gold, preferably physical gold in your personal possession. How much? That's up to you; but with gold paying about the same interest as treasury bills, with much lower risk, and with the multitude of economic problems still lurking out there, I think 10 to 20 percent of your liquid assets would be a good place to start, and going over half would not be at all imprudent. At the moment, Cash is King, and gold is the King of cash.

Don't get swept up in illusory losses and gains due to the volatile pricing of fiat currencies like the US Dollar, either. Track your investments and net worth in gold, and don't be afraid to cut the under-performers from your portfolio. However ugly things look now, you want to be worth more gold next year than you are worth today.

Let me know if there's any way Priced in Gold can help.