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Hedging against currency crisis with electronic gold

Thursday, March 18th, 2010

Back in January this year, we talked about protecting yourself against currency crisis in Protecting yourself against currency crisis. The basic idea of that article is that the time to prepare for such an eventuality is before TSHTF. Once it happens, it is too late.

For our Australian readers, this seems to be less of a worry because there is still an air of optimism (relatively) among the population. But for our American readers, the nagging feeling of fear and brooding seems to be permeating among the masses. As the author of this book, The Ultimate Suburban Survivalist Guide: The Smartest Money Moves to Prepare for Any Crisis, wrote in the introduction,

Do you have a pervasive sense of anxiety, as if our modern world is on thin ice? Do you have an uneasy feeling that Wall Street seems to be collapsing under the weight of bad debts and bad decisions- and dragging your job along with it? Or, maybe you feel our society is coming apart at the seams, and that our civilization could actually break down and collapse.

You are not alone. A lot of people are worried. In fact, there is a growing movement of people who are preparing for the end of the world as we know it (TEOTWAWKI).

That book is written in an American context. If you are an American reader, please let us know how true or accurate this is in the comments below.

Now, for this article, we will stick to the original point (currency crisis) and not venture to the theme of TEOTWAWKI (survival skills/gears, self-sufficiency, guns, supplies stockpiles, etc). We hazard a guess that the TEOTWAWKI theme is of more interest to our American readers than to our Australian readers. But if enough readers express their interests in TEOTWAWKI, we may do more research and write more about it. If not, let’s stick to the topic. (By the way, contrarians like Marc Faber are alluding to the TEOTWAWKI theme).

Okay, back to currency crisis. There are two components to hedging yourself against currency crisis:

  1. Diversify your assets overseas.
  2. Prepare a cache of physical monetary assets (e.g. physical cash and physical gold/silver).

For the second component, our book How to buy and invest in physical gold and silver bullion would cover it very well. But for this article, we will look at the first component.

One of the ideas (and note, they are ideas- nothing in this blog should be taken as financial advice) that is floating around in our mind is electronic gold. We first touched on this idea two years ago in What is the future of silver?,

Today, we have a very powerful technology that can solve the convenience and sub-divisibility problem (see Properties of good money) associated with [using] gold [as] money- computers. All we need is a trusted central repository of gold (perhaps today?s central bank can change its institutional role for this purpose) and let computer systems keep track of ownership and transfer flow of gold money. In other words, the gold is physically kept in a secure central location while the finer sub-divisions and change of ownership of gold money is recorded as bookkeeping entries on computers. No physical movement of gold is necessary.

This passage was written to refute some of the views that gold can never ever function as money again because it will be physically inconvenient (or beyond imagination) to carry minuscule amount of physical gold as money to buy small items (e.g. bread).

Well, two things against this argument:

  1. In Zimbabwe, people were already used flakes of gold to buy bread (see the video at Rural Zimbabweans are desperately panning for gold powder to ward off starvation).
  2. The same problem of inconvenience existed two hundred years ago and that’s why mankind invented the use of warehouse receipts for gold as a proxy for money (the history of money is written in more detail in our book, How to buy and invest in physical gold and silver bullion). Warehouse receipts for gold are the precursor to the paper money we have today.

In this current age of information technology, this problem can be easily solved with electronic gold. In fact, there are quite a few electronic gold solutions currently implemented today. One of them is (which we disclose that we have an affiliate interest with them).

One very important thing to remember: the whole point of owning gold is to own an asset that is nobody’s liability (if you want to understanding the reasoning behind it, please read How to buy and invest in physical gold and silver bullion). That will eliminate most gold ETFs, gold futures, gold CFDs, etc because they are basically financial assets disguised as ‘gold’ as they exist as a liability in someone else’s balance sheet. As for other types of gold that you do not take physical possession for yourself (e.g. kept in vault storage on your behalf), you have to look at them on a case-by-case basis to ensure that

  1. You own the legal title to the gold (i.e. your gold is really yours and not belong to the liability column of someone else’s balance sheet), and
  2. Trust that they are able to physically deliver your gold to you on demand.

So, if you trust, then they fulfil these two criteria. But do not let us tell you who to trust or not to trust- seek advice, do research and decide for yourself.

When we first heard of, we imagine a world whereby gold becomes money and payments can be made back and forth electronically as conveniently as PayPal. If you have a full-holding account in, you can certainly do that with their patented technology. We don’t see why it can’t be done.

But we talked to those guys and found out something interesting. Apparently, most of their clients do not use as electronic gold money (as we imagined in our fantasy). In reality, most of them link their full-holding account with their bank accounts all over the world. Why would someone do that? Here is what we think (bear in mind, this is just our opinion)…

Remember, back in Protecting yourself against currency crisis, we wrote

Personally, we feel that the best way to protect you from a currency crisis is to leave the country before TSHTF.

If you believe that all paper fiat currencies will eventually depreciate significantly against gold, then it makes sense to hold gold. Let’s say you have a cache of physical gold and you decide to leave the country? That means you have to lug your physical gold to that country where there’s always a danger of loss in transit from bandits, thieves, corrupt officials, ship-wrecks, air-crash, etc. Or maybe the custom officers in both the source and destination country may not look in favour of anyone bringing in physical gold. Whatever the reason, you may not feel comfortable having so much valuables in your physical possession while you’re on transit to another country. For a big fat filthy rich person, it is physically too demanding to lug around his large stash of gold.

GoldMoney. The best way to buy gold & silver So, here come the folks at Since you have already set up links between your full-holding account and the various overseas bank accounts all over the world, you do not have to worry about hauling physical gold around. (Of course, having some physical gold coins in your pocket will always be useful for things like paying for a space on a leaky boat to travel to that country- jokes aside, we mean it is not wise to completely do away with having some physical gold in your physical possession).

So, the next time you visit a foreign country, you may want to open a bank account over there!

Meanwhile, please vote on the poll below: