How safe is digital gold?

[jcw]

Here's a short mp3 of a recent interview with GoldMoney.com's CEO James Turk.

They talk about the recent prosecution of the company e-gold over money laundering matters, and the precautions which GoldMoney takes to comply with the law (they're based in Jersey) and safeguard customers' interests.

http://www.kereport.com/DailyRadio/Daily072208.mp3

I am bound to say, jcw, that I would not personally place my exchange value in e gold with any company. The reason being this just another form of fiat. A "promise to pay" if you like. Little different to the original goldsmiths of old who would store your gold for safe keeping and then issue you with a note that promised to "pay the bearer" of the note. At some point, the goldsmiths realised that there was not likely to be more than 10% of the depositors ask for the their gold back at any one time. They then went on to realise that they could lend out gold in the form of promisory notes alone on the basis that the note could "in theory" be redeemed at any point. As a consequence, people bagan to use these promisory notes as exchange units. Thus, paper fiat was born. Of course, if the depoisitors ever lost confidence in what now amounted to something similar to a modern bank, there would be a bank run. 90% of the depositors were dissapointed, to say the least, to find the bnank didn't actually posess their gold at all.

Eventually, our governments tidied up this problem of the goldsmiths lending money into existence by making it illegal for anyone other than a central bank to issue fiat. Of course, the CB was still playing the same fractionall reserve lending game itself, lending money into existence. But they held a store of gold to act as a fundamental back-up in the eventiuality that the depositors wanted their real money (the gold) back. Following the depression of the thirties and absolutely since the seventies, the paper fiat of the western world has been de-pegged from a gold standard. This means that our paper fiat is now backed by absolutely nothing. Yep...that's right...bugger all!

I see companies offering e gold as a re-invention of the role of the old goldsmith. People are placing their fiat into these companies without seeing the gold in question. The temptation to do a bit of fractional reserve shennanigans must be incredibly high.

Give me real money every time. Physical bullion...

I'm well aware of the history of how paper money was introduced in Europe.

As I've said before GoldMoney provides a service where customers buy allocated gold and silver. The metal belongs to the customer and GoldMoney organizes storage and insurance and a convenient means to buy and sell. The serial numbers of the bars are published.

There is no "promise to pay". The metal belongs to the customer and if they wish, they can take delivery of the metal.

If you say they store less gold and silver than the customers own, you are accusing them of fraud.

You may be unfamiliar with the fact that James Turk is one of the leading anti-paper money contrarians.

The fact that customers can pay each other by transfering ownership (so called digital gold payments) is merely an aside. The primary service is allocated gold and silver.

The use of the term "e-gold" may have misled you.

[UndercoverElephant]

jcw

Thanks for the input. I think I will allocate a portion of my cash to a GoldMoney account - something like 10% (£10K). I'm convinced they are as safe as a bank account and I think it is likely that over the 18-months or so it takes for house prices to do their major crashing that this will provide a better return than any bank account. I could be wrong, but I think I'm willing to take that chance.

Geoff

[jcw]

jcw

Thanks for the input. I think I will allocate a portion of my cash to a GoldMoney account - something like 10% (£10K). I'm convinced they are as safe as a bank account and I think it is likely that over the 18-months or so it takes for house prices to do their major crashing that this will provide a better return than any bank account. I could be wrong, but I think I'm willing to take that chance.

Geoff

In the present financial climate probably safer than most banks.

I think 10% is a sensible fraction. Don't let the price volatility disturb you. It's like an insurance policy. There's an old saying "put 10% of your savings in gold and hope it doesn't work", i.e. hope that disaster does not occur to the financial system.

[Little John]

Here's a short mp3 of a recent interview with GoldMoney.com's CEO James Turk.

They talk about the recent prosecution of the company e-gold over money laundering matters, and the precautions which GoldMoney takes to comply with the law (they're based in Jersey) and safeguard customers' interests.

http://www.kereport.com/DailyRadio/Daily072208.mp3

I am bound to say, jcw, that I would not personally place my exchange value in e gold with any company. The reason being this just another form of fiat. A "promise to pay" if you like. Little different to the original goldsmiths of old who would store your gold for safe keeping and then issue you with a note that promised to "pay the bearer" of the note. At some point, the goldsmiths realised that there was not likely to be more than 10% of the depositors ask for the their gold back at any one time. They then went on to realise that they could lend out gold in the form of promisory notes alone on the basis that the note could "in theory" be redeemed at any point. As a consequence, people bagan to use these promisory notes as exchange units. Thus, paper fiat was born. Of course, if the depoisitors ever lost confidence in what now amounted to something similar to a modern bank, there would be a bank run. 90% of the depositors were dissapointed, to say the least, to find the bnank didn't actually posess their gold at all.

Eventually, our governments tidied up this problem of the goldsmiths lending money into existence by making it illegal for anyone other than a central bank to issue fiat. Of course, the CB was still playing the same fractionall reserve lending game itself, lending money into existence. But they held a store of gold to act as a fundamental back-up in the eventiuality that the depositors wanted their real money (the gold) back. Following the depression of the thirties and absolutely since the seventies, the paper fiat of the western world has been de-pegged from a gold standard. This means that our paper fiat is now backed by absolutely nothing. Yep...that's right...bugger all!

I see companies offering e gold as a re-invention of the role of the old goldsmith. People are placing their fiat into these companies without seeing the gold in question. The temptation to do a bit of fractional reserve shennanigans must be incredibly high.

Give me real money every time. Physical bullion...

I'm well aware of the history of how paper money was introduced in Europe.

As I've said before GoldMoney provides a service where customers buy allocated gold and silver. The metal belongs to the customer and GoldMoney organizes storage and insurance and a convenient means to buy and sell. The serial numbers of the bars are published.

There is no "promise to pay". The metal belongs to the customer and if they wish, they can take delivery of the metal.

If you say they store less gold and silver than the customers own, you are accusing them of fraud.

You may be unfamiliar with the fact that James Turk is one of the leading anti-paper money contrarians.

The fact that customers can pay each other by transfering ownership (so called digital gold payments) is merely an aside. The primary service is allocated gold and silver.

The use of the term "e-gold" may have misled you.

I am not unfamiliar with James Turk's postition with regard to fiat.

Indeed, I would not necessarily question Turk's company in particular since he does appear to be utterly on the level.

My problem is with the in-principle nature of the product being marketed.

You say it is different.

Well, let me quote you from your post above...

The fact that customers can pay each other by transfering ownership (so called digital gold payments) is merely an aside. The primary service is allocated gold and silver.

I take it this rather uninteresting "aside" is something akin to what the goldsmiths would have no doubt told their customers who were holding proimisory notes. "Don't worry, the fact that you are exchanging your gold with a promisory note is merely and "aside".."

There is no "promise to pay". The metal belongs to the customer and if they wish, they can take delivery of the metal.

You say there is no promise to pay. Well, if you don't hold the gold; Instead all you hold is an electronic record of who does hold the gold such that you can, in theory, redeem it at any point, I would like to know how you can logically call that by any definition other than a promise to pay.

Again, somewhat similar, don't you think to the "record of ownership" as embodied in the pieces of paper issued by the goldsmiths.

Whichever way you look at this, an electronic record of ownership in the absence of possession is no different in principle to a paper record of ownership in the absence of possession.

They are both fiat. They are both records of ownership with a promise to pay.

The fact that one is paper and the other is binary bits of data on a hard drive really is an aside. Except, perhaps, to note that the capacity to fractionally "cook the books" is a damned site easier with binary data than with pieces of paper with ink on them.

You may well argue that Turk's compnay is utterly principled. You may well be right. The point is, though, that Turk is operating a system of e-fiat.

History tells us that fiat always, without exception, has ended up in tears as a result of fractional reserve lending practices leading to currency debasing inflation and, eventually, deflationary implosion. Turk would, I have no doubt, argue this himself.

You may argue that history, on this occassion, does not have to repeat itself.

I beg to differ...

[SILVERHARP2]

[quote="stevecook172001
You may argue that history, on this occassion, does not have to repeat itself.

I beg to differ...[/quote]

It is a case of sleeping with one eye open, the main advantage now is the internet, any suspected lending out of gold would be picked up on and reported on the goldbug websites for instance in relation to gold ETF's. either way it is an abstract argument as most retail investors will own gold in different forms and should be clued in enough to reallocate if they thought something was going wrong.

[Little John]

It is a case of sleeping with one eye open, the main advantage now is the internet, any suspected lending out of gold would be picked up on and reported on the goldbug websites for instance in relation to gold ETF's. either way it is an abstract argument as most retail investors will own gold in different forms and should be clued in enough to reallocate if they thought something was going wrong.

"This time it's different".....

maybe...

However, by posessing your own physical bullion you don't need to worry about sleeping with one eye open.

You can close them both in the certain knowledge that your money cannot be fractionally messed around with

Call me Mr Cautious.....

[RenewableCandy]

I'd be worried about it being nicked, though.

[Little John]

I'd be worried about it being nicked, though.

true.....

[jcw]

I'd be worried about it being nicked, though.

It's insured.

Customers pay for storage and insurance.

@stevecook172001

Remember that there is a difference between paper money and fiat money.

Fiat means "let it be done", i.e. government impels people to pay using a certain currency.

Paper money is just paper money, which may or may not be a promise to pay something real.

It so happens that most currencies are paper/digital in the forms of accounts and also fiat.

I haven't read the details about GoldMoney but BullionVault keeps distant electronic records as well as local electronic records as well as printed copies of the customers accounts on paper.

Following your type of argument most owners of houses do not own their house, as the deeds are locked up in a bank somewhere and not in their personal possession.

GoldMoney and BullionVault exist to make sure people can buy gold and silver which is real and vaulted and thoroughly documented. That's what their business is all about and how they are almost unique.

[SILVERHARP2]

[quote="stevecook172001]"This time it's different".....

maybe...

[/quote]

I'm not saying it is going to be different as such, I'm just saying I don't care (for now). A different example is gold confiscation which comes up from time to time as a discussion topic, the US gov may "try" to do what they did in the 30's but again I don't think people would line up infront of their banks and exchange their gold for FRN's.
the ideal situation is to have a mix, some gold on hand in case you have to leave Dodge in a hurry and some gold stored abroad in case your home gov comes after it some fashion

[Catweazle]

Following your type of argument most owners of houses do not own their house, as the deeds are locked up in a bank somewhere and not in their personal possession.

I can assure you that my house is very much in my possession, and I check it's status every day. It's not going anywhere and is unlikely to mysteriously disappear or suddenly become much smaller.

[UndercoverElephant]

It is a case of sleeping with one eye open, the main advantage now is the internet, any suspected lending out of gold would be picked up on and reported on the goldbug websites for instance in relation to gold ETF's. either way it is an abstract argument as most retail investors will own gold in different forms and should be clued in enough to reallocate if they thought something was going wrong.

"This time it's different".....

maybe...

However, by posessing your own physical bullion you don't need to worry about sleeping with one eye open.

You can close them both in the certain knowledge that your money cannot be fractionally messed around with

Call me Mr Cautious.....

It really is different this time. The internet has changed everything. Before the internet, power was about who controlled the information. That is why the Chinese government has denied the Chinese people unrestricted access to the internet. Now nobody controls the information. You can find out almost anything on the internet if you know where to look and are careful enought to sift through the rubbish to find what you are looking for.

[Little John]

It is a case of sleeping with one eye open, the main advantage now is the internet, any suspected lending out of gold would be picked up on and reported on the goldbug websites for instance in relation to gold ETF's. either way it is an abstract argument as most retail investors will own gold in different forms and should be clued in enough to reallocate if they thought something was going wrong.

"This time it's different".....

maybe...

However, by posessing your own physical bullion you don't need to worry about sleeping with one eye open.

You can close them both in the certain knowledge that your money cannot be fractionally messed around with

Call me Mr Cautious.....

It really is different this time. The internet has changed everything. Before the internet, power was about who controlled the information. That is why the Chinese government has denied the Chinese people unrestricted access to the internet. Now nobody controls the information. You can find out almost anything on the internet if you know where to look and are careful enought to sift through the rubbish to find what you are looking for.

It works in both directions. Bollocks can be disseminated much more quickly that before.

Fraud can be commited much more efficiently than before

The internet simply means that all human behavious from the most noble to the moist ignoble can be perpertrated on a more effficient scale than ever before.

That is all.