Tuesday, September 18, 2012

The Gold Debit Card (Patent Pending)

No, not gold status, gold bullion.

For the past few years I've watched the Fed print money to deal with the economic malaise we've experienced since 2008. It became evident that rather than let markets clear, deleverage and reform the rot in our economic system, that we would "extend and pretend". First it was to get us through the initial crisis that saw our financial system on the brink. Then, as time went by I saw that "pretending" had become the new normal. Congress didn't do any substantial reform. Frank-Dodd was passed essentially as an empty bill with no realistic plans towards its implementation. Even today, the CFTC has delayed implementing position limits on gold and silver futures allowing JP Morgan and HSBC to (allegedly) manipulate the prices by creating naked short positions out of thin air. The Fed, once they had dropped interest rates to zero, seemed to have only one policy tool left: PRINTING DOLLARS.

Once I recognized this, it became clear that the US dollar which had already been devalued under President Bush and Fed Chair Alan Greenspan, would be massively further devalued bu President Obama and current Fed Chair Ben Bernanke. At first I looked to other currencies, primarily the Euro, but soon it became apparent that the rot and dysfunction in the financial markets was not a uniquely American problem, it was the entire western world and Japan.The US, Europe, Japan, Great Britain and even Switzerland (!) have all embarked on quantitative easing (printing) to deal with profligate spending, an excess of debt and faltering economies. No currency, it seems, will be a refuge or preserve purchasing power. Only gold seems to be up to the task.

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The problem:
  • Currencies in the US, Japan and Western countries are no longer seen as a long term store of value.
  • Gold is a long term store of value but an imperfect means of exchange

The obvious conclusion is to hold gold to hedge inflation and preserve purchasing power. Problem is, gold is not very liquid. Most people don't want to walk around with gold in their pocket. And though countries are turning to gold for large transactions and central bank currency diversification, its not readily accepted at your local grocery store. Even if it were what would they give you as change?

The solution:
  • A financial product that facilitates transactions in gold and yet is familiar to the consumer and acceptable to merchants.
So how does it work?

Clients would be able to establish a gold account online then send in say 1 oz of gold.
Once received by GDC (Gold Debit Card) their account would be credited with 31,103.47 milligrams (1 Troy Oz.) of gold. At today's gold price of $1766 per oz., each milligram is worth about 5.7 cents. Once the deposit is credited the customer receives an ordinary debit card. A sweep account is set up through a participating banks. When the client uses their debit card to make a purchase, say a $4 loaf of bread at the store, their account is debited for 70 milligrams of gold ($4.00/ 5.7). The merchant is credited for the $4 purchase in their local currency by the participating bank's merchant services. The participating bank's merchant service are then credited by GDC, and sell gold in the open market. The daily debits of all customers are of course aggregated into one daily gold sell order, with the proceeds paid to bank merchant services, thus completing the gold debit card cycle.

 As gold appreciates in value, the purchasing power increases. In the example above, if gold went up to $2,000 an ounce, each milligram of gold would be worth about 6.4 cents meaning only 62.5 milligrams instead of 70 would be needed to pay for that $4 loaf of bread. Of course, the price of bread will go up with endless quantitative easing but gold should do very well in preserving purchasing power. Much better than the dollar, euro, yen or pound.

Where will I go with this? I'm not sure yet, but I have filed for a patent with the US Patent Office and the future (Thanks to QE to Infinity) looks better and better for such a product.

1 comment:

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