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The Money Wars

Dear Reader,

The week just ended has certainly been a corker.

First up was what I suspect (and hope) was the final death rattle of the capitulation in gold and gold shares we have been warning subscribers about for the past couple of months.

Specifically, on February 28, 2013, we sent the following rare special alert to all paid subscribers to The Casey Report as well as all of our metals publications…

"We are sending this special bulletin to readers of The Casey Report, as well as all Casey metals publications – BIG GOLD, the International Speculator, and Casey Investment Alert – because of the level of fear in our market sector today. There is a possibility that some investors will panic, as many did in 2008, and do the wrong thing at precisely the time when they should be making the trades that will become their biggest wins. To help avoid this, we've developed a "gold insurance trade," as you can see below.

We want to stress that we see no change in the fundamentals that drive the trends we're betting on and are not changing our forecasts for gold and silver, which always included the possibility of near-term correction. We are not altering our essential strategy. We are merely suggesting an options trade that can help mitigate near-term downside.

If you know yourself and your nature as an investor well enough to know that you can hold or buy your way right through any more corrections to come this year, feel free to ignore this trade. But it's crucial to be honest with yourself about this.

If the truth is that you are feeling uncomfortable with your current position in precious metals and related stocks – especially if, perhaps, you got carried away and invested more heavily in this sector than recommended – you should consider the near-term "insurance trade" we're suggesting. It's far better to "waste" a little money buying insurance now than to panic later and realize unnecessary losses if other buyers disappear from our market and prices go into free-fall (for a time).

Please give this matter serious thought, and do whatever is best for you."

We then went on to explain a simple and inexpensive options strategy to use to cover any losses from a major down move such as experienced this week.

To help people understand the fundamental realities of the capitulation in gold, and how to profit, we hastily assembled a webinar titled Downturn Millionaires: How to Make a Fortune in Beaten-Down Markets, which was broadcast last week free of charge.

If you haven't yet viewed the program, featuring Doug Casey, Bill Bonner, Rick Rule, Louis James, John Mauldin, and yours truly, I would urge you to set aside the time to do so today. At the risk of being accused of being overenthusiastic, I really do think it has the potential to be life-changing.

Here's the link to Downturn Millionaires.

 So, what happened to cause gold's bad, bad day this week?

Frankly, I have no idea. I could, of course, trot out the usual suspects: JPMorgan, central bank selling, trend-tracking technical traders, hedge funds deliberately triggering the collapse to profit from shorts, and so forth.

The simple reality is that gold is a small market – the total global value of "investable gold" (gold that isn't, for instance, bound up in crown jewels) is estimated to be about $2.4 trillion.

By contrast, the global bond market is estimated at about $90 trillion and the global stock market about $55 trillion.

This means the gold market is susceptible to being pushed around. Depending on which side of the market you are on at any given time, the resulting volatility can either work in your favor or take you out at the knees. Especially if you use leverage in futures markets without the proper hedges in place.

But the point is this: gold's daily, weekly, and monthly price action – all of which can be subject to the whims of the big-money institutional players – are pretty much irrelevant if you view gold in its proper context as a monetary metal.

And by that, I mean the role that gold has played as a store of value for over 5,000 years.

In his book The Golden Constant, Roy W. Jastram underscored the point with the following…

"Since the 14th century, gold's purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world's currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no one's liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge."

For me, the simplest way to understand gold, and the opportunity inherent in the current correction, is to answer the following question.

If you had to bet on whether 1,400 US dollars or an ounce of gold will buy more in ten years, which would you bet on?

While the US dollars certainly have a role to play in everyday life, to the extent that you choose to sit on large amounts of greenbacks earning next to no interest, versus buying gold on dips, is essentially the same as making the wager just described.

Personally, I'm buying.

The True Import of the Boston Bombings

The other big story of the week was, of course, the coordinated bombing of the Boston Marathon.

Considering the size of the crowd and the nature of the bombs, it's remarkable that more people didn't get seriously injured.

Unfortunately, what has been seriously injured – once again – is American freedom, because this event and the ones that will surely follow will inspire the authorities to begin unwrapping all the new homeland security powers constructed since 9/11.

Just as it is impossible to predict the price of gold tomorrow, it is impossible to gauge how the government will respond, or how much collateral damage will be done. Who could have predicted, after 9/11 – an act committed by Saudis and Pakistanis – that the US would attack Iraq?

What appears clear, at least to me, is that the very nature of terrorism and the invariable reaction of the nation-state being attacked set the stage for bad, bad days for liberty.

Without anything even remotely resembling a "front line," the authorities – no matter how powerful – are at a huge disadvantage to the terrorists. And so the authorities reliably respond by proactively limiting the liberties of the general population, twisting and turning the screws in ways to ensure an ever greater consolidation of power in the hands of the state, "for the public good."

While I'm reluctant to underscore the point with lessons from the Nazi experience, because there is no mental construct I can come up with that ends with the US government becoming that bad, I do think that particular history offers useful insights. The following quote is from a website that focuses in-depth on aspects of the German culture, its people, laws, customs, history, etc.

"When the Nazis came to power in 1933, they capitalized on the tendencies of the legal bureaucracy, centralizing control of the police and administration of the courts and making widespread use of special courts. Ostensibly, the laws and institutions remained the same. However, the spirit of the law and the legal system were gradually and totally subverted by the agenda of the Nazi leadership. When the "sound instincts of the people" demanded it, as interpreted by the Nazis, the rule of law was completely ignored.

The impact of Nazi ideology was greatest on the Criminal Code and the Code of Criminal Procedure. The Third Reich greatly broadened the definition of criminal activity, particularly in the category of crimes against the state, and made punishment much harsher. The Code of Criminal Procedure was distorted almost beyond recognition by the activities of the Nazi-inspired People's Court, in which those convicted of crimes against the state were often sentenced to death. In twelve years, an extensive network of special and summary courts of indeterminate jurisdiction was developed.

The police, whose powers and responsibilities were significantly broadened, became tools of the ruling party under the direct control of the minister of interior. The regular police – including city and town forces, motorized gendarmerie in rural areas, and administrative police, who administered codes and regulations – were supplemented by much more powerful internal security units. These included the Security Police (Sicherheitspolizei), which incorporated the Criminal Investigation Police and the Border Police, as well as the newly formed Secret State Police (Geheime Staatspolizei – Gestapo). Two other of Hitler's organizations, the Storm Troops (Sturmabteilung – SA) and the Guard Detachment (Schutz-Staffel – SS), in company with the Gestapo, became infamous as instruments of Nazi brutality."

Internal Security,

Jumping forward to this very moment, the following is the mission statement of the Department of Homeland Security, the organization set up post-9/11 to consolidate the nation's various security apparatus.

"The Department of Homeland Security has a vital mission: to secure the nation from the many threats we face. This requires the dedication of more than 240,000 employees in jobs that range from aviation and border security to emergency response, from cybersecurity analyst to chemical facility inspector. Our duties are wide-ranging, but our goal is clear – keeping America safe."

Meanwhile, in Boston, the streets are overrun with US military personnel doing the whole "your papers, please" thing.

And they are joined by special police units, fully militarized and equipped for the sort of action one would expect in an active shooting war.

All of this might be rationalized, I suppose. After all, it appears a small gang of crazed bombers was on the loose in Boston, sneaking around on the hunt for their next target.

Unfortunately, as governments predictably fight the last war, they will assume that all further public gatherings will be bombing targets. And so such gatherings will be increasingly cordoned off and controlled.

At this very moment, pipe-smoking intellectuals hired by the Department of Homeland Security are studying the  Boston bombings and concocting new strategies to prevent it from ever happening again, an impossibility.

While 9/11 was clearly the more spectacular attack, it was also far more limited. To wit, the attack focused around hijacking airplanes from national airports and using them to hit buildings.

Preventing further such attacks was a relatively simple thing – starting by armoring cockpit doors. Problem solved.

In the case of Boston, however, the attack was focused around causing casualties in a large gathering of the sort that happens all around the country every day of the week. Who's to say that the next attack won't come at a popular local beer fest or state fair? Then, in addition to more energetically scanning external threats, the Eye of Sauron will turn even more inward.

And when the next and more effective Boston happens, you can bet the "sound instincts of the people" will support the state in implementing strategies that even today will seem overly intrusive. In no time at all, those intrusions will extend to pretty much every corner of life in the United States and every other country that still holds the United States up as the gold standard of governance.

One of the advantages of living here in the Argentine outback is that I have cut the cord on the constant arm-waving favored by the mainstream media. Not only does this hugely lower stress levels, it helps one regain some perspective on what's actually important.

The Boston Marathon bombings are important, no question about it. That's because they give permission to the military-industrial complex to ratchet things up to the next level, setting a new baseline from which the power of the state can grow even further.

And, to be clear, I'm not just talking about increased Internet and telephone surveillance, or being subjected to security screenings and pat-downs before being allowed to enter any public event or climb on any mode of public transport. Part of the mix will be an expanded body of "follow the money" regulations, providing cover to the government's already escalating efforts to track every penny in the economy and to keep as much of it locked within national borders as possible.

To the extent that new forms of money such as Bitcoin arise – with a stated purpose of allowing people to circumvent state scrutiny and have control over their financial transactions – is the extent to which the state will use its considerable power to crush them.

It is up to each of us as individuals to determine the things that are important to us in attempting to live a fulfilled life. The vast majority of people living in the US post-Boston will accept as necessary the next layer of security that descends upon the country. In time, being subjected to a pat-down before being allowed to enter the stands at the regional Little League championship will become as routine as the TSA screening at airports.

And the state's destruction of Bitcoin won't even raise an eyebrow.

For those who find such things as aggravating as sand in the eye, however, life in the US and those nations that copy it will become increasingly unpleasant. And, in time, perhaps put them at a very real risk of losing their liberty entirely. For example, by failing to sheepishly follow the instructions of a TSA operative in a prompt and courteous manner.

In the new world we are quickly on the path to living in, even playing by the old rules won't ensure that you'll come out okay. Just ask the people who trusted the banks in Cyprus. Do you really think that, going forward, should any bloated state need your money, it won't engineer a similar asset stripping? Or, as the Obama budget envisions, change the rules on your retirement accounts in favor of the state?

We live in a complex world, no doubt about it. For an individual who subscribes to the ideal that they should be free to pursue life, liberty, and happiness, the fact that the state now restricts many of the choices we might otherwise make in those pursuits is beyond irritating.

I know myself well enough to know that I don't do well under the heavy pressure of the state, and so other than relatively short visits, I have built my life in a freer clime, outside of the US.

Maybe you have a list of reasons as to why you can't internationalize your life. If so, then a recent article by Doug Casey on the topic might be of interest. Here's the link.

And because I refuse to leave all of my assets within the easy grasp of the state, or those who use the state to steal the wealth of individuals, I have taken the necessary steps to move a good percentage of my assets to other political jurisdictions.

This is not to say I try to evade taxes; that would be a fool's game. So I make no attempt to hide the assets from the state and file all the increasingly onerous forms. My sole purpose is to ensure that, in order to grab my assets, the government will first have to file a suit in a foreign jurisdiction, requiring more time and effort trying to get at my assets than they are worth.

✓ I could go on about internationalizing your life and your finances, but there's a much better way to get the full story. And that's by checking out the upcoming free Casey Research webinar, Internationalizing Your Assets, Tuesday, April 30, at 2:00 p.m. EDT.

Panelists include Doug CaseyPeter SchiffMike MaloneyKevin Brekke, and yours truly.

You can register for this free webinar by clicking here now.

For those of you who choose to do nothing, just accept that you'll be subject to the vagaries of the nation-state and its operatives. Which is to say, you can only hope that as things evolve, cooler heads will prevail and the state security apparatus in all its many forms will be kinder and gentler than those that blossomed in similar circumstances throughout history.

But don't be surprised if it isn't.

As for me, instead of adopting the slogan favored by so many concerned patriots, "Live Free or Die," I think it is far better to tweak the words to read, "Live Free and Thrive."

A minute ago I mentioned Bitcoin. On that topic, and the battle over money, I will now turn the platform over to periodic correspondent and former US military "hard man" Pete Kofod.

The Money Wars

By Pete Kofod

The study of money is an ancient affair. Aristotle discusses it extensively, and the Books of Wisdom are filled with proverbial counsel on the matter. People spend time and effort accumulating money in hopes of establishing conditions for a better future. Because humans can paradoxically harbor laziness and ambition in their heart at the same time, they have reached two irrefutable and rather obvious conclusions about money: they would rather have more than less, and they would rather have it sooner than later. Because of these observations, humans go about three tasks: obtaining money, protecting money, and growing money.

Before seeking to achieve those three objectives, it is important to define money. It is impossible to consistently do all three tasks if one does not understand the nature of money. An academic definition that sounds reasonable is that money is an agreed-upon medium of exchange that overcomes the limitations of barter and coincidence of wants. For money to be useful, it must be widely recognized and accepted by various market participants. Wide acceptance is among the most considered and sought characteristics of money, a trait known as liquidity. Until recently, money was either established by market discovery or by decree. The Laws of the Network have introduced a third mechanism, money established by network consensus.

Honest Weights and Measures

Gold has served as money since the beginning of recorded human history. Desired for its beauty and scarcity, gold is easy to divide and difficult to counterfeit. While many other commodities including tobacco, salt, pepper, and even sea shells have been used for settling accounts, natural discovery and social interaction have repeatedly established gold as a medium of choice, leading to the phrases "good as gold" and "the gold standard." Over two thousand years ago, Aristotle postulated on the qualities of what made good money. These qualities included durability, portability, divisibility, and scarcity.

Search the Internet and you will find extensive and detailed essays covering Aristotle's work, complete with examples, though it should be relatively obvious why those characteristics are sought in money. Gold advocates argue that currency not backed by gold is not money and, in the case of the United States, unconstitutional. Detractors of the yellow metal consider gold a nostalgic money instrument, a "barbarous relic," to quote Keynes.

What Keynesians and monetarists alike are hesitant to admit is that while they recognize the importance of scarcity in money, they believe that the scarcity should be managed by an omnipotent monetary power. In other words, it should be scarce for most, but not all. Gold doesn't abide by that; it is scarce for everybody.

There is one attribute of gold that Aristotle did not address in his enumeration of desirable monetary qualities, and that is anonymity. Of course, Aristotle would have no way of knowing how society would devolve into an arrangement in which every transaction and communication is parsed, analyzed, and correlated to serve corporate marketing interests and state security apparatuses. Because gold holds a high degree of value density – 25 pounds of gold take up the space of a brick and are worth around US$550,000 – significant monetary sums can be transported and transacted beyond the nosy oversight of state bureaucrats. The US Congress recently considered legislation that would make purchasing gold a reportable event to tax authorities. The public backlash was swift and strong, causing the proposal to get discarded, but it is almost certain to pop up in the future and is all but inevitable. In fact, it was the effort of compliance, not privacy, that drove the matter. Subjects in America and the West have, after all, long since abdicated any expectation of privacy from their government.

Fiat – Judge, Jury, and Executioner

"Because I told you so!" Words uttered in despair by a parent, whether due to the precocious and inquisitive nature of a child or merely their own ignorance and weariness of debate. Regardless of cause or validity, the statement indicates to the child that the issue is considered settled and any further pursuit of the matter will be considered an infraction of house rules.

The word "fiat" stems from Latin meaning "let it be done," or as the captain on the starshipEnterprise would often quip, "make it so." To declare something by fiat is to establish it as fact, regardless of historical precedent or evidentiary backing. Fiat currencies are therefore currencies by decree, compensation to be accepted because authorities said so.

It is not the purpose of this brief essay to be a monograph on the topic of fiat currency. For that I would recommend Rothbard's brilliant yet very readable book, The Case Against the Fed. I will, however, liberally lean on Rothbard in formulating my points regarding fiat currency.

Since fiat currency is by definition called into existence by decree – unlike gold and other resource-based monies, which have risen to become widely accepted by broad consensus – a firm and clear backing must be established, or the fiat currency carries no more weight than promissory notes passed between children in a classroom.

Enter legal tender laws. US Federal Reserve notes are inscribed with the phrase, "This Note Is Legal Tender for All Debts, Public and Private." Ask most people why that phrase is on the note, and they will reflexively tell you that it allows you to accept it as payment. Even modest contemplation on that statement should raise the proverbial baloney flag. Does a merchant really need permission to accept a paper note as payment? After all, vendors are free to accept virtually anything as barter, including paper with ink on it, regardless of color. No, the declaration on the note compels the vendor to accept the note as payment. This is commonly referred to as a legal tender law.

As previously mentioned, it is beyond the scope of this article to explore how central banking, fractional reserve, and fiat currencies came to be. Many books, ranging from uncontroversial documentaries to far-flung theories, have been dedicated to the subject. It is, however, important to recognize that all modern official currencies are in fact fiat currencies. The standardization for this occurred in two steps. The first occurred at the Bretton Woods conference in 1944. The conference had many objectives, but the key decision made was that all sovereign currencies would use the United States dollar as the reserve currency, and the dollar would in turn be backed by gold.

Given the chosen arrangement to establish a global reserve currency, selecting the US dollar was hardly a controversial move. Nations in the Americas were the only countries whose soil was not being ravaged by World War II. Furthermore, the United States was rapidly growing as a manufacturing powerhouse, generating the economic activity that could justify the dollar's ascension to the role of global reserve currency. By demanding that the dollar be backed by gold, other nations were granted comfort that some non-political restraints were placed on the dollar in the future.

In the 25 years after World War II, America enjoyed a unique position in the world. She had vast manufacturing capacity left over from the war and took upon itself much of the heavy lifting associated with rebuilding the rest of the world. That, combined with being the de facto shepherd of the world currency, produced a period of unprecedented prosperity and growth. By 1970, America had rebuilt the world, including former foes that would emerge as economic competitors.

By that time, however, the United States' expanded role in the world had led it into a number of military actions around the world, including the war in Korea and the disastrous and costly war in Vietnam. At the same time as waging warfare abroad, America rolled out an even costlier and ambitious welfare program.

As America's welfare and warfare apparatus expanded, her friends and allies started to question her ability to continue being a responsible steward of the world reserve currency; in particular the ability to redeem dollars for gold at $35 per ounce. Knowing that the world was right and America was wrong, President Nixon severed the US dollar from gold backing. The two most notable features of the announcement were that it was utterly devoid of anything resembling truth, but more important, the lack of significant international response at the time. The hook had been set, and all conditions required for dollar fiat hegemony were established.

As the dollar was severed from a gold-backed standard, two trends emerged. Predictably, politicians embarked upon a virtually unrestrained multi-decade spending spree. The dumber the idea, it seemed, the more money was thrown at it. As America's vaunted manufacturing base was slowly eviscerated, due in no small part to the cost of carrying the state, the country turned to "high finance" for funding its expenses. The only defining quality of federal expenditures was how they consistently and without fail exceeded the budget, resulting in serial deficits and a commensurate accumulation of debt. Since America is the steward of the world's reserve currency and no viable alternative has yet emerged, she continues her spending spree unabated to this very day.

An even more destabilizing trend began to emerge. Being the world reserve currency carries with it responsibilities that transcend immediate national objectives. For example, the dollar must remain impartial even in circumstances where America finds herself in an adversarial relationship with another nation. Simply put, you cannot ask a country to back its currency with the dollar and then use that position to impose your political will through monetary sanctions, yet that is exactly what America has done over the last forty years, and done repeatedly.

To be clear, since one of the purposes of a reserve currency is to serve as a common intermediary for the settling of accounts in transnational commerce, denying a nation the ability to transact in dollars restricts its ability to trade and is therefore, by long tradition, considered an act of war.

And so it is that every time America tries to impose her will on the world stage through dollar-based sanctions, the long-term viability of the dollar as the currency of reserve takes a hit. Even if America weren't spending herself into oblivion and kept a tight balance sheet, repeatedly using the dollar to achieve global political objectives has, unsurprisingly, significant unintended consequences. For starters, if nations and people around the world start to believe that arbitrary edicts can restrict access and flow of dollars, alternatives will be sought.

Of course, such alternatives do not emerge overnight. Complex accounting systems and banking mechanisms overwhelmingly use the dollar as the common denominator, but when the chicanery becomes significant enough, people will be forced to seek redress in the market.

A perfect example is how America deals with Iran. Long a pariah of American politicians, Iran's nuclear ambitions have been restricted (or attempted to be) by America. It appears that blocking free access to dollars has significantly curbed Iran's nuclear production capability, at least up until now. As a consequence, Iran has been forced to go through various "money laundering" exercises to gain access to dollars, which in turn allows it to continue to participate in the global economy. The abandonment of the US dollar as an impartial market participant, and its transition to prosecutor and executioner on the global stage, has not gone unnoticed. Muslim nations, rightly fearing that they might also get caught up in a financial dragnet, have started to discuss an asset-backed pan-regional currency. Petty politics have largely kept it from materializing, but as American monetary and foreign policy continue their erratic path, expect to see more world players seeking an alternative to the West's stranglehold on the venue of setting international accounts.

GuerillaCoin – Crypto Currencies, Darknets, and Free Markets

Amidst the raging academic battle between those who fiercely advocate gold-backed monetary systems and the proponents of centrally issued fiat currency, a new money candidate has emerged, a contender that claims to bring a new way of doing business to the timeless need for conducting it. Crypto-currencies are digital currencies that have risen out of the inexorable invasion of technology into modern society.

Crypto-currencies have several common characteristics. They are not issued by a central authority, or at least not a central authority bolstered by nation-states' police agencies. People are free to accept them or not. They are digital, so they can readily be used to pay debts around the world with a single click, provided the payee accepts them as tender. Their use is not limited or governed by political borders. If parties to a transaction have access to the Internet, and in some instances even that is not required, they can settle accounts without going through an intermediary or banking authority.

This radical concept has unsurprisingly found a significant amount of skeptics. Some of the concerns include matters of jurisdiction. Since central authorities are not involved and many transactions occur across great distances, how are issues such as fraud addressed? The overriding question, however, should be whether it is a required characteristic of money that it should act as a fraud deterrent. The answer is, probably not. Reducing and prosecuting fraud falls into the realm of security services, whether it is a state agency such as the FBI or private escrow services such as provided by PayPal.

Another jurisdictional concern is whether crypto-currencies face proscription by the state. That issue speaks to the larger question regarding the long-term viability of central banking and the steps that the state is willing to take protect its respective central bank's monopoly on issuing money. Assuming that in time the state will seek to clamp down on crypto-currencies to protect national "print-erests," given the technical architecture of these usurpers, will the state even be in a position to eradicate them? Adherents of crypto-currencies overwhelmingly say no, pointing to the state's inability to shut down narcotics and other contraband traffic, including "hard" currency trades in countries with tightening capital controls.

Combined with the observed fact that governments facing social unrest such as during the "Arab Spring" were unable to prevent news from leaking out via social media, there is much to be said about that argument. Aside from taking the poison pill and shutting down the Internet, the distributed transaction mechanism of crypto-currencies makes them highly resilient to state interference. Of course, in banning the use of crypto-currencies, the state can restrict their direct market access, but as history has repeatedly shown, all that does is create a separate marketplace, complete with capital exchanges, more commonly referred to as money laundering.

Linden Dollars – Second Life

For those unfamiliar with it, Second Life is a virtual world on the Internet that is developed and operated by Linden Labs. Second Life allows for people to create an online identity known as an avatar that participates in all aspects of life including commerce and socialization. Real-life businesses have set up presences in Second Life, including the networking giant Cisco, which presented parts of its massive symposium Cisco Live in the Second Life environment.

Second Life has a currency called "Linden dollars," which allows people to transact exchanges in Second Life. By itself, this is unremarkable. After all, it is common to give players "play money," the most common being perhaps Monopoly. What is fascinating, however, is that a Linden dollar to US dollar exchange emerged, called Lindex. It allows people to purchase and sell the virtual currency in the real world.

This is done for numerous reasons. Land is a scarce resource in Second Life, and some people wish to purchase this scarce commodity. Others purchase and sell online services, including virtualized "taboo" services. For some people, Second Life is a venue to run a separate life, without the cultural and regulatory restrictions they face in their own community and jurisdiction. As such, they are willing to part with real-life money to obtain a virtual identity in Second Life.

As with any free society, where there is a need in the marketplace, in time there is an offering to fulfill that need. As a result, enterprising individuals and firms have set up shop in Second Life, where they offer goods and services. After being paid in Linden dollars, they convert some of their earnings to US dollars via Lindex. Welcome to the world of virtual currency. Linden dollars may only be accepted in Second Life, much as the Maldives' rufiyaa are not readily accepted outside the Maldives, but the fact that one can exchange currencies between virtual and real life gives power to virtual communities and in fact makes them an integrated part of the world's economy.


While the Lindex emerged as a mechanism for converting currency between the virtual and real worlds of Second Life participants, fundamentally Linden dollars are for selling and purchasing goods and services within Second Life. True crypto-currencies, on the other hand, seek to augment and perhaps even supplant existing real-world currencies. Crypto-currencies are gaining broader acceptance in the market place, and the most popular by far is Bitcoin.

Bitcoin is the brainchild of Satoshi Nakamoto, the pseudonym for an individual or group of software developers who wrote the original Bitcoin software and protocol. Bitcoin is designed to be introduced gradually over time and eventually reach a maximum number of coins in circulation. Much like gold is mined, bitcoins are "mined" using software. It takes time, luck, and computational resources to generate bitcoins. Bitcoins use cryptography to thwart attempts at counterfeiting, and because of the system design, there is no central authority responsible for issue of the coins or oversight of transactions. Bitcoins are by design anonymous, distributed, and scarce.

For years, Bitcoin had been relegated to the realm of libertarian techno activism and unregulated markets like Silk Road. In response to the fiscal woes of Cyprus and the arbitrary demands of the European Central Bank, awareness was raised among people that all was not well in the world of central bank-managed currencies. While many are still unaware of the pernicious influence of central banking, they are painfully aware of the consequences of overt confiscation and consequently will seek mechanisms to protect their liquidity. Bitcoin, speculative as it may still be, is potentially such a mechanism as it is stored and transacted outside the purview of the central banks and their affiliates.

In the spring of 2013, Bitcoin's leading role as an alternative currency resulted in the inevitable manic rise and crash of its value against the USD. The fact that Bitcoin did not collapse to zero, however, is very telling of its potential as a long-term currency. Even after the crash, mining for bitcoins continues at a frenzied pace, and an increasing number of mainstream vendors accept Bitcoin as payment. While time will tell, it appears that Bitcoin survived a big speculative bubble. In fact, it is perhaps Bitcoin's meteoric rise and fall that will eventually rein in speculation and allow it to mature as a viable global currency.


It must come as little surprise that as Bitcoin has climbed in popularity, alternatives have emerged, including Litecoin, Namecoin, and PPCoin, as well as other minor contenders. They are all based on a similar deployment mechanism in which a relatively fixed amount of "coins" are released over a period of time through a cryptographic mining process.

Of course, their various developers and cast of supporters proclaim that their flavor is "like Bitcoin but better." In some instances, the argument for superiority is that Bitcoin will not produce enough coins to effectively meet concurrent market demand. The biggest irony of that argument is that it is the identical argument made by Keynesians and monetarists, the very groups that crypto-currency supporters relentlessly pillory with valid arguments about currency debasement.

Another criticism, in this case perhaps somewhat valid, is that bitcoin mining has emerged to become a process requiring dedicated computational hardware to be able to do successfully, pushing it into the realm of dedicated miners, thereby voiding the previous distributed and perhaps egalitarian access to mining coins. There may be some truth to this matter. After all, Bitcoin adoption as a viable currency depends on wide distribution of the coins as well as broad acceptance of it as payment. By algorithmically setting a fixed regular release of coins, the goal was to release at a rate that loosely followed adoption, at least initially. Of course there would be some advantage to early adopters, but it was not meant to be an opportunity that granted wealth to those who purchased the best crypto-analyzing hardware. Mining was meant to merely be a process that required just enough effort to obtain the money, without it being a fantastic speculative opportunity.

As the saying goes, "the best-laid plans…" While it appears that it is "mathematically impractical" to counterfeit the various crypto-currencies, there is absolutely nothing preventing anyone from starting their own currency. The ability to launch me2coin may either be the death knell of crypto-currencies or their saving grace. After all, if a myriad of currencies appear on the market, how is this beneficial to the price discovery mechanism? Isn't it possible that the market may proclaim that understanding the concept of crypto-currencies in general and Bitcoin specifically is hard enough without having to distinguish between dozens of suitors vying for market acceptance? Perhaps, but another possibility is that Bitcoin's rapid ascent out of the realm of cypherpunk and anarchist micro-markets and its subsequent flash crash will get Bitcoin back on track. Put more plainly, the copy cats provide the valuable service of restricting Bitcoin's price from climbing into the stratosphere, keeping it on a more steady path towards broader acceptance.

Putting the Chips on Red and Black

Drunken sailors have often been undeservedly used as metaphors of government spending, when the truth is a drunken sailor eventually runs out of money, wakes up, and has to go back to work. Therefore for decades, holding precious metals was seen as a hedge against central bank manipulation and government profligacy. Prudent speculation offers an additional alternative in the emergence of crypto-currencies, and Bitcoin in particular. Bitcoin is still very young, and many things can still go wrong. Technical, legislative, and public relations land mines can all waylay its grand ambitions of serving as the egalitarian currency of choice in a post-nation-state world.

That being said, activists in the Bitcoin community are doing all the right things. Perhaps most important, mistakes are flushed out and solved in the open. There are no backroom deals by bankers carving up the hopes and dreams of Cypriots to pay for their own speculative folly. Instead, Bitcoin mining and transaction data is readily viewable by all that participate in the Bitcoin ecosphere. No hidden balance sheets or stealing from the unwashed masses to protect the ill-gotten wealth of the oligarchs.

If you have not yet started with Bitcoin, dip a toe in and start small. Read about Bitcoin and perhaps start mining. It is not as difficult as it sounds, and there are many online resources available to get you going. In time, you may find that Bitcoin merits a place in your diversified portfolio.

Pete Kofod is the CEO and co-founder of The Sixth Flag, Inc. A former Army officer, Pete has spent over fifteen years in the technology sector.

Friday Funnies

A man and a woman were married for many years. Whenever there was a confrontation, yelling could be heard deep into the night. The old man would shout, "When I die, I will dig my way up and out of the grave and come back and haunt you for the rest of your life!"

Neighbors feared him. The old man liked the fact that he was feared.

To everyone's relief, he died of a heart attack when he was 98. His wife had a closed casket at the funeral.

After the burial, a concerned neighbor asked, "Aren't you afraid that he may indeed be able to dig his way out of the grave and haunt you for the rest of your life?"

To which the wife answered, "Let him dig. I had him buried upside down… and I know he won't ask for directions."

How Italians Tell Directions

This video is slightly on the ribald side, but very funny.


And That's It for This Week

I'm putting away the tools early this week in order to head up to Cachi, a small town in the high desert about five hours from here.

Studies have been done demonstrating that people who leave their electronics behind when going on holiday feel far more relaxed than those who cling to their smartphones, iPads, and so forth throughout.

So, with that, I will hit the send button, load up the truck, and head up into one of the more remote and interesting parts of the Argentine outback, a big land populated with proud gauchos, pumas, condors, and breathtaking sites around every corner. Have I mentioned lately how much I love living down here?

Until next time, thanks for reading and for being a Casey Research subscriber!

David Galland
Managing Director
Casey Research


“Totally Incorrect” with Doug Casey

New York Times bestselling author, Doug Casey joins John O’Donnell and Merlin Rothfeld to talk about his new book titled “Totally Incorrect”, a stern look at what is wrong with many areas of our world. Doug and crew also look at the recent decline in commodities, in particular gold and gold miners for trading and investing opportunities. As well as the macro picture for our financial markets here in the states.

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