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SOVEREIGN MAN

Why hold gold in deflation?

December 23, 2011
Santiago, Chile

First off, happy holidays. I hope this email finds you in good health and cheer.

Down here in Chile, I intend to spend the weekend (and most of next week) doing absolutely nothing but reading, relaxing, and riding horseback with friends around our new 1,000+ acre farm. I’m excited that many readers will soon be joining me.

Personally I’m not much for the holidays. The last two months of the year (starting with Halloween) feel a lot more like forced consumerism– people buying useless trinkets with money they don’t have for the sake of others they hardly know, or for close friends who simply don’t care.

I prefer to opt-out of the whole nonsense and simply tell the people I care about that they’re important to me. On that note, I’m truly grateful for our daily conversations and the many wonderful relationships that this letter has brought.

2012 will undoubtedly be a difficult and challenging year for the global economy. But I can promise you that the world is not coming to an end. The game is simply being reset with a new set of rules.  And whether young or old, rich or poor, the decisive, creative mind will thrive.

It’s overwhelming to see how many people are waking up to reality, educating themselves, and taking action. And I’m truly humbled to play a part in this movement. Thank you for being a reader, and I look forward to our continued conversations.

With that, a few questions from this week:

Tom Childs writes, “Simon, regarding Chile, what are your thoughts about the very considerable risk of burgeoning volcanic activity in the country? Is your retreat in any way threatened by an expanded volcanic crisis?”

Quite frankly, volcanic activity in Chile is actually Argentina’s problem.

The prevailing Pacific winds blow to the east, picking up ash and dumping it on neighboring towns in Argentina. During the last minor eruption, ash was swept as far east as Uruguay.

I wouldn’t want to be at the foot of a volcano, in Chile or anywhere else. Our farm, however, is more than a safe distance away. We have great views of some volcanoes and snow-capped Andean peaks… but I have zero concern of seeing any lava in my living room.

Next, in response to my comments about weaknesses in the banking system, Patrick writes, “Simon, while the US government may be bankrupt, they will just print more money to cover any FDIC insured assets if a major bank went under. More than likely they wouldn’t even let it go under.”

At this point, the FDIC’s insurance fund is woefully undercapitalized. Meanwhile, banks are sitting on nearly incalculable losses (real and nominal) for having accumulated so much worthless paper.

Some people may take comfort that the US government will bail out depositors by printing more money… that the deposit risk in the US banking system is negligible because Bernanke will simply conjure more money out of thin air. I’m not one of these people.

To me, a bank is safe because it is profitable (not because of clever accounting tricks) AND well-capitalized. False promises and guarantees of monopoly money provide me no sense of confidence.

What’s more, for individuals with a higher net worth, the insolvent FDIC can only guarantee up to $250,000 anyhow. So fundamentally, the central issue falls back on a bank’s creditworthiness. I’m not willing to take that chance with US banks.

Last, Stefan asks, “Simon, you mentioned that you’re investing in precious metals… suggesting that you hold a consensus view that inflation is what we’re in store for. What if the crisis actually produces the opposite effect– deflation– and the value of precious metals falls?”

Deflation certainly is a possibility. I’m not squarely in one camp or the other… I look at the totality of circumstances, and in my travels around the world (I hit over 40 countries this year), I objectively look for signs of both.

At the moment, I see far more signs of -inflation-, but that’s because I’ve spent my time this year in many developing nations where the US exports inflation.

Here’s the thing– if the debt bubble bursts and many of these insolvent countries do default (which is quite likely), it could cause a massive deflationary chain reaction in which the price of gold drops dramatically.

Whether any potential deflationary effects are short-lived (like 2008) or long-term (Japan), I still want to own gold. Along with a debt-bubble bursting will come a severe loss of confidence in the fiat system… and gold is a great hedge in this scenario.

More on that soon. I hope you have a great and restful holiday period. Best wishes from all of us to you and your family.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Neal

    Gold is money and nothing else. It is not a promise to get money in the future. It is money in your hand, paid in full! Money is that which extinguishes ALL debt. A promise to get gold is not gold. A promise is I O U. A broken promise is worthless.

    • biteme11

       And as Simon has mentioned, when entering certain foreign countries declaring gold coins is only necessary for their “face value’ and not actual gold value. Hence my 1/4 once Canadian “Maple Leafs” would be declared at $10 Canadian and NOT their actual value in gold. The more you look into it, the bettter gold coins seem as an investment.

  • Elai

    Hey Simon, which countries in the world would have to gain from the USA, Europe and China financially collapsing  around the same time.  I really can’t think of any.

    Also, with all the travelling you do, how do you have a romantic life?  Do you just go to bars if your not too busy or do something more?

    • John Galt

      Yes, I’m curious too… I’ve started a very nomadic life and maintaining a relationship isn’t easy…!

      • Anmse

        Relationships can be challenging when you’re on the road a lot, but if you want to learn how to pick up women regularly & reliably to fulfil your sexual needs, here’s how:

        http://pua-zone.com/

  • ChooHader

    Because in deflation, MONEY rises in purchasing power.   And fiat is NOT money.  It is debt.   Debt sucks in a deflation because it becomes impossible to pay back.   If you think budget deficits are bad now…   The printing will be massive no matter what happens.   Do yourself a favor and buy heavy load of silver.   Gold is almost as good.   If you can afford to buy a lot of gold, you should probably buy platinum which should always be more expensive than gold because it is far more rare, more expensive to produce, more subject to supply disruptions, and more useful.  Take advantage of this dip.   At the least average in more physical now, if it goes lower keep disciplined.

  • investorscooter

    Simon-
    I am looking at Chile, also, and like a lot about what I read. Will be making first trip in Feb. However, I had read that Chile has one of the largest gaps (and growing) in income inequality. Does this not contribute to the possibility of social unrest? Crime? The necessity for personal protection? I’d like to see you address this issue and how you think it might play out, as otherwise I feel this country to be highly attractive. Thanks.

  • John Conners

    Simon, you were right on the money warning readers to obtain dual citizenship now, when it’s still possible.  For those who didn’t catch the news, France is tightening its citizenship requirements to include language fluency and a test on French culture and history.

    I am proud to have obtained Italian citizenship this month.  I found it interesting that the office had a steady stream of Americans obtaining Italian passports, with a line at all times 5 or 6 persons deep.

  • Benjamin Dunphy

    I sincerely doubt that the renmibi will replace the dollar. The Chinese economy is looking to collapse just like every other centrally-planned or -subsidized economy in history. 

  • 1st Generation American

    “…but Americans have an incredible ability to ignore the obvious and kick the can down the road.”  Yet another one of Simon’s cheap shots at the American people which almost seem daily.  I don’t even know what specifically you’re referring to in the above quote.  I definitely think there are many things to criticize about the U.S. government (especially our foreign policy and our sprint towards hyperinflation) and I think there are many fair criticisms of the American people but I don’t think that constantly insulting the American people really helps the quality of these “Notes From the Field” or your newsletter. Further, while I share your anger and frustration with the U.S. government, most governments around the world aren’t much better, if not worse.  Are there some countries that may be better to live in than the United States as we go through financial apocalypse?  Sure, and that’s why I read Sovereign Man – to find out where those places are.  
    However, as a child of immigrants – my mother and father each coming from different continents – I find the constant America-bashing to be immature, narrow-minded, and quite frankly insulting.  I don’t know what happened to you in the Army Simon, but your attitude towards the country you’re from seems beyond rational criticism and quite frankly, you’re much more anti-American than people I’ve met from some anti-American parts of the world.  I’ve don’t recall you writing anything positive about the United States other than when you said you had fun skiing in Colorado.  It’s something I guess.  

    The reality, whether you like it or not, is that people in almost every underdeveloped part of the world are still eager to come here, and I think that trumps all your world travels in giving us a global perspective of just “how bad” the United States is.  Even among developed nations, you generally find that the number of people that emigrate to the United States is greater than the number of Americans that leave for other developed nations.  In other words, more Canadians tend to move to the U.S. than vice versa, year in and year out.  Further, if Americans are so stupid and we’ve managed to come this far, just imagine how successful we’d be if we were “smart” by your standards. 

    I enjoy your newsletter for the most part but I don’t appreciate your elitist, anti-American cheap shots.  If nations really are “just lines on a map” as you say, you sure to have a lot of negative feelings directed towards what’s inside those lines that make up the borders of the United States.  From what I gather of your personality, you may be happy to see that you’ve offended me and it may be proof to you of how smart you are, but I find you’re misunderstanding of America to detract from your otherwise credible reporting.  I’m sure you’ll continue to bash America but did you ever wonder if some people around the world hate us so much because of the way people like you talk about the country you’re from?

  • biteme11

    Readers,

      Dec. 21. 2012 is indeed the last day of the ( Maya – not “Mayan”) 13th Bak’tun, the end of a 5,125 year (Maya) cycle. Not the end of the world; it is the end of a (Maya) period.

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